Europe and Central Asia External debt and resource flows

Debt and indicators
Aggregate resource flows
Key Indicators

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Stock markets in Eastern Europe suffered significant declines in the wake of the global stock market turmoil in October 1997, and interest rates in several countries (particularly Russia) rose sharply. Nevertheless, bond issues and loan commitments to the region continued at about the same pace as in earlier quarters. Aggregate net transfers to the region increased to $36 billion in 1997, compared from $31 billion in 1996, as debt flows and grants registered strong increases. Net equity flows stayed about the same. The $6 billion increase in private flows was entirely accounted for by increased flows to Russia. Average debt indicators remained roughly unchanged from their levels in 1996. GDP growth rose from 0.2 percent in 1996 to 2.3 percent in 1997, as 17 of the 25 region’s economies achieved positive growth rates (and Russia’s GDP increased for the first time since the start of its transition to a market economy).

Debt and indicators

EXTERNAL DEBT STOCKS CONTINUE TO RISE. Europe and Central Asia’s stock of long-term external debt totaled $316 billion in 1997, up 6 percent after the 2 percent increase in 1996. The $140 billion in official debt in 1997 was about the same as in 1996; about 80 percent is owed to bilateral creditors. Private debt, which rose by about $20 billion, accounted for 56 percent of the total. Most of this guaranteed by debtor governments. Russia concluded an agreement to reschedule $33 billion (including $7.5 billion in interest arrears) to commercial banks. Russia also was admitted as a full-fledged member of the Paris Club in September, enabling it to participate on an equal footing with other creditors in future rescheduling agreements.

DEBT INDICATORS ARE UNCHANGED. The region’s 8 percent increase in export receipts in 1997 did little to change debt indicators, despite the increase in the stock of debt. The average debt to exports ratio for Europe and Central Asia was 102 percent in 1997, down slightly from 105 percent in 1996 but well below the level of 142 percent in 1993. The debt service ratio remained at about 11 percent in 1997. These debt ratios remain well below the average for developing countries (134 percent for the debt to exports ratio and 17 percent for the debt service ratio in 1997).

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Aggregate resource flows

Aggregate long-term resource flows to Europe and Central Asia rose from $46 billion in 1996 to an estimated $51 billion in 1997. Most of the change was due to the increase in net private flows to Russia. Net flows from official creditors declined to $9 billion, from $11 billion in 1996.

PRIVATE LENDING SURGES. Net private long-term debt flows rose from $11 billion in 1996 to $17 billion in 1997. Net lending from bonds jumped from $3 billion in 1996 to almost $10 billion in 1997, as issues by Russia increased sixfold and by Poland fourfold. The region’s increased access to international markets was marked by debuts from subsovereign entities (such as the Russian cities of Moscow and St. Petersburg) and increased participation by private corporations. And unlike East Asia and Latin America, access to international capital markets does not appear to have been much impaired by the East Asian financial crisis, as bond issues were roughly unchanged in the fourth quarter and loan syndications increased strongly.

EQUITY FLOWS UNCHANGED. Total equity flows to Europe and Central Asia were an estimated $24 billion in 1997, about the same as in 1996. Net FDI in the region was $16 billion in 1997, with Poland the largest recipient ($4.5 billion) followed by Russia and Turkey (just under $3 billion apiece) and Hungary ($2 billion largely due to the privatization of Matav, the telecommunications company). Portfolio equity flows totaled an estimated $9 billion in 1997, and were marked by considerable volatility over the course of the year. Flows surged in the first half of the year (despite turmoil in the Czech Republic), with Russia’s stock market shooting up 129 percent and Turkey’s 65 percent. But stock markets in Poland, Russia, and Turkey fell significantly with the increase in market turmoil in late October (although by the end of the year stock markets generally remained well above January levels), and several countries likely experienced outflows of portfolio equity toward the end of the year.

COMPOSITION OF PRIVATE FLOWS GREATLY ALTERED SINCE 1991. The increase in net long-term private flows since the break up of the Soviet Union (from $4 billion in 1991 to $41 billion in 1997) has been accompanied by a significant shift in the source of finance. In 1991 FDI accounted for 81 percent of long-term private flows, and debt flows the remainder (with private nonguaranteed debt close to zero). By 1997, FDI’s share had fallen to 38 percent, and with the emergence of stock markets in several countries portfolio equity accounted for 21 percent of private flows. The sharp increase in private debt flows (from $1 billion in 1991 to an estimated $17 billion in 1997) has increased their share to 41 percent of private flows, and $7 billion are not guaranteed by debtor governments.

Key Indicators
Billions of U.S. dollars

a. Preliminary.

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GNP per capita, 1996: $2,200

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