Parthasarathi Shome: External debt: An analysis of BRICS

Unlike in other such reports, India doesn't fare too badly in comparison with its BRICS peers

The 2017 edition of cross-country external debt is just out. I ask how India has fared, as I have asked time and again for many such available comparative information. More often than not, India lingers at the bottom. I am therefore glad to report at the start of the year that India does not fare poorly in a BRICS comparison. 

Countries can define international debt in different ways, reflecting the context of discussion. In this multilateral context, external debt is defined as the sum of public, publicly guaranteed, private non-guaranteed long-term debt, use of IMF credit, and short-term debt. Thus it is comprehensive. And gross national income (GNI), which is the base, comprises the sum of value added by all resident producers plus any product taxes (less subsidies) not already included in the valuation of output, plus net receipts of primary income (compensation of employees and property income) from abroad.

Figure 1 immediately reveals that, during 2000-2015, China’s position has invariably been the most comfortable (as in so many cross-country economic indicators) in that, at less than 15 per cent, it has had the lowest external debt to GNI ratio since the turn of the millennium (the data period).
 

And India has been a clear second, varying above 20 per cent, even though the present worry of the government should be that, in the last decade it has gone up by almost 10 percentage points, a considerable increase. Nevertheless, one has to admit that India, despite economic liberalisation since the 1990s, has remained away from an external debt trap defined as a condition in which a country borrows merely to make its interest payments. 

By contrast, South Africa’s condition has seriously worsened, rising from less than 20 per cent to nearly 45 per cent in 15 years, while Brazil lowered it from nearly 50 per cent in 2002 to almost 30 per cent in 2015. These reflect Brazil’s impressive economic performance during the 2000s until challenged by internal corruption since 2015. In the same vein, South Africa’s statistics reflect to no small extent the steady worsening of its economy and the anticipation in international circles that it will soon have to embrace improved macro-economic policies. Russia is difficult to comment on, remaining primarily a petroleum-based economy.     

A country’s ability to service external debt is dependent on its export capacity. The ratio of external debt to exports does not necessarily follow the pattern of external debt to GNI and the differences reflect how open or autarkic each country is: In 2015, exports/GNI was 13.6 per cent for Brazil, China 24.6 per cent, Russia 33.4 per cent, South Africa 34.4 per cent, and India 21.6 per cent. Indeed, this ratio had all increased during 2000-15, in Brazil by 2.8 per cent, China by 7.6 per cent, India by 8.4 per cent, South Africa by 4.7 per cent. Only Russia declined by 12.2 per cent (reflecting declining global petroleum prices), thus rendering its comparability futile for our exercise. 

Figure 2 reveals that, external debt as a per cent of exports, China again fares better than the others, remaining broadly around 50-60 per cent. South Africa initially is below China but deteriorates over time, reaching 130 per cent, though it is a significant diamond exporter and could tweak its supply as global conditions prompt. India’s performance has actually improved, declining from over 160 per cent to 108 per cent. It is Brazil that has vacillated, experiencing a U-shaped curve, beginning at 360 per cent in 2000, declining to 109 per cent in 2008, and rising again to 230 per cent by 2015. Such erratic performance, alternating calm and turbulent waters, is typical of selected Latin American economies. India, on the other hand, has had a steady course overall, in being able to finance its external debt service.    

A similar pattern is revealed among BRICS countries in Figure 3 which shows interest payments on external debt as percentage of exports (rather than GNI). And
Figure 4 reveals, in polynomials, that the average interest rate on new external debt commitments has not risen, and has possibly tapered, across BRICS. The exception appears to be China which has faced a slightly higher average interest rate recently. While India’s rate has experienced a wave-like trajectory, the most recent years reveal a welcome declining trend.  

Concluding, one needs to ponder the level of international reserves that BRICS nations possess for any need to amortise external debt. Other than China, reserves as a percentage of external debt have hovered below 100 per cent. In the case of China, it rose to 500 per cent in 2009-10 and currently is still well above 200 per cent. No wonder the community of nations often complains, correctly or incorrectly, that China achieved this through an under-valued exchange rate enabling high exports.

Source: International Debt Statistics - 2017, World Bank Group