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Debt Servicing Risks Could Scare Away Investors – IMF

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The International Monetary Fund (IMF) has warned that rising debts in emerging countries could pose risks to financial stability in the medium term as the increasing debt servicing risks could see investors shying away.

Last year, Nigeria had spent $464.05 million and N1.47 trillion servicing external and domestic debts respectively.

Nigeria’s debt portfolio has been on the rise in recent times and the federal government has increased its external debt as part of measures to cut back high cost of servicing its domestic debt. It has raised $5.5 billion dollars from the Eurobond market in the space of six months and another $300 million from a diaspora bond.

Addressing a press conference on Global Financial Stability during the World Bank/ IMF meetings holding in Washington DC, yesterday, the financial counselor and director for the Monetary and Capital Markets Department, IMF, Tobias Adrian noted that negative growth is being expected in some regions despite the positive global outlook on the rising debt levels.

According to him, countries that are building up debts, have weak fiscal  buffers, liquidity and wide foreign exchange margins are more exposed to the risk of negative growth in the years to come. Noting that three vulnerabilities make the road ahead bumpy for countries, Adrian said emerging markets and low income countries could face a sudden tightening in global financial conditions.

“Such an event could lead to a reduction in capital flows. Debt sustainability in low income countries has deteriorated and more complex creditor composition pose challenges for any future debt restructurings.

“We have seen a rebound in bond issuance by low income countries at frontier markets last year and even this year despite the global market vulnerabilities, the issuance has been strong from these countries. The IMF is trying to provide technical assistance to these countries on sound debt management as well as on how to make sure they can keep track of all the borrowings and leave as few as possible data gaps,” said Adrian.

On her own part, IMF Assistant director Fiscal Affairs Department, Catherine Pattilo, noted that the rising risk of unsustainable debt servicing of most countries in Sub-Saharan economies could see investors shy away from the bond offerings of these countries in the future.

Noting that two-third of countries in Sub Saharan Africa (SSA) are at high risk of paying back or servicing their debts, she called on countries in the region to look inwards in raising the much needed fund for growth by expanding their tax base.

IMF director, Fiscal Affairs, Vitor Gaspar, likewise emphasised on the huge levels of debts globally saying, public debt is currently are historic highs in advanced and emerging economies. “In emerging market economies, debt at almost 50 per cent for GDP on average, is at levels that in the past have been associated with fiscal crisis.

“It is imperative that low income developing countries strengthen their tax capacity. This will allow then to meet their debt service obligations. It will also allow them to finance spending priorities such as health, education and public infrastructure to attain the 2030 Sustainable Development Goals.”

Meanwhile, the International Development Association (IDA), an arm of the World Bank has launched its first bond in its nearly 60-year history, as investors around the globe seized the opportunity to invest in a triple A-rated asset and support life-changing investments in the world’s poorest countries.

The bond, which marks the launch of IDA’s borrowing programme in the global capital markets, raised $1.5 billion to address some of the most pressing development issues.

IDA provides technical expertise and low-cost financing for projects and programs that boost economic growth and reduce poverty in the world’s poorest countries— from tackling conflict, fragility and violence; forced displacement; climate change; and gender inequality to promoting governance, institution building, creating jobs and supporting a strong private sector for economic transformation.

Until now, IDA has been virtually unleveraged, building up an unparalleled equity base of $158 billion. In 2016, IDA shareholders agreed to transform IDA’s financing model, leveraging its strong capital base to pioneer a new model for development finance that combines donor funding with funding raised in the capital markets. IDA’s borrowing program will enable IDA to significantly scale up its support toward achieving the Sustainable Development Goals, while offering investors an efficient way to contribute to global development.

World Bank Group President Jim Yong Kim said “Today’s bond issue will allow IDA to tap into the power of capital markets to tackle some of the world’s biggest challenges and help millions lift themselves out of poverty. While it is a new bond issuer, IDA is an established institution, with an almost 60-year track record as the leading source of development finance and expertise for some of the fastest growing economies in the world. As a borrower, it leverages its unrivaled capital position – the largest equity of any multilateral development bank – and decades of strong donor support, a solid track record of repayments, and prudent financial management.”

World Bank Vice President and Treasurer Arunma Oteh said: “IDA received a resounding response from the market for its debut issuance. Investors globally seized the unique opportunity to be the first to invest in IDA’s triple-A rated bond and make a positive impact in the lives of hundreds of millions of people around the globe. I want to thank investors, lead managers and all the bankers for their personal engagement and commitment to making IDA debut such a fantastic success.

“As we grow IDA’s borrowing programme, we will continue to ensure a strong financial condition and prudent financial and operational management for IDA. We will also continue to put to work for IDA the World Bank Treasury’s 70-year track record of innovation in connecting capital markets with development,” she said.



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