What is external debt?

Introduction

When material resources and / or financial aspects of an economy do not cover domestic demand, the supply deficit is covered by importing goods, services and capital.

International migration of capital is generated not only by the absolute need of capital mentioned above, but also by the possibility of a more favorable exploitation of the available capital in a country other than that in which it was formed. This way arise the actual flows of financial linkages among countries. A lot of these flows take the form of foreign loans granted or received.

In what does the external debt consist of?

It includes all loans solicited by the government or by corporations or private households, resident to the country.

The debts due before the passage of a calendar year are considered commercial loans and are not included in the foreign debt. Neither the loans from citizens or enterprises with private capital are included, because of the fact that they are impossible to observe statistically.

The nature of external debt

External debt can be:

• external public debt contracted by public sector (the state)
• external public debt contracted by the private sector and guaranteed by the state
• external debt non-guaranteed contracted by the private sector

External public debt includes only state foreign exchange commitments guaranteed by the state, for which the repayment term exceeds one year. By taking also into account state unsecured loans, the result is gross external debt.

After deducting from the gross debt in relation to abroad a countries own claims from non-residents, the result is the net external debt.

Considering the duration of loans, they may be:

• short term loans (1-2 years)
• medium term loans (3-5 years)
• long-term loans (less than 5 years)

When establishing the deadline, three distinct periods are set: the period of use for the credit, grace period (when no payments are made to repay loans) and the actual repayment period.

In terms of repayment of loans, the following methods are available: repayment in equal rates, unequal reimbursement rates and reimbursement in a single tranche.

Analysis of a country’s external debt includes issues related to size, debt structure and its influence on macroeconomic aggregates.

The statistical indicators are divided into:

• statistical indicators of the amount of external debt
• statistical indicators of the external debt structure
• statistical indicators of the effects of external debt

The legal framework of external public debt of Romania

External public debt is recorded, monitored and managed by the Ministry of Public Finance (Law no. 313/2004, with subsequent amendments).

According to this, external public debt is the debt the government representing all the states’ financial obligations, resulting from loans contracted directly or guaranteed by the state to individuals or legal entities that are not residing in Romania.

Local public external debt is the part of local public debt representing all financial obligations of local authorities, from the loans contracted directly or guaranteed by individuals or legal entities, residents of Romania.

Government debt instruments include, but are not limited to:

• state bounds, domestic or foreign
• state loans from banks, other credit institutions, Romanian or foreign legal entities, under terms resulted from negotiations
• state loans from governments and foreign government agencies, international financial institutions or other international organizations
• temporary loans from the availabilities of the general account of the National Treasury, under the provisions of the law
• state guarantees

Analysis of external debt – Romania

According to the latest available statistics, Romania’s’ external debt on medium and long term was, on August 31st 2010, of 70,621 million Euros (80. 5 % of the total external debt, increasing by 7.5% from December 2009).

Short-term external debt recorded on August 31st 2010 a level of 17 141 million Euro (19.5% of total external debt), up 17.4% from December 31st 2009.

External debt on medium and long terms, on December 31st 2009, was at a level of 64 208 million (81.6% of total external debt), up by 24.0% compared to December 31st 2008.

Short-term external debt on the same date was of 14 448 million (18.4% of total external debt), down 29.8% from December 31st 2008.

Analysis in terms of debt structure and maturity reveal significant changes. Thus, after annual growth rates of over 31% between 2004-2008, private sector foreign debt climbed only 10% in 2009 (up from 39 billion), decreasing by 9% its weight in the total debt (up about 60%).

Of the total disbursements in 2009 (23.3 billion), about 9 bln represented proceeds of loans from the IMF, EU, World Bank and EBRD, within the financing program granted to Romania.

The service of external debt on short and long term in 2009 was 12 bln Euro, amount from which 9.9 bln Euro represented capital rates and 2.1 bln euro interests and commissions.

At the end of the year 2009, the external debt on medium and long terms represented 56.5 % from GDP (increasing with 19.5% in comparison with the end of the previous year) and 181.2 % in comparison to the exports of goods and services (increased with 59.3%). Both indicators are ranked at levels of concern, indicating the necessity of the unproductive fast elimination of expenses and the orientation towards the industries with export potential.

The structure of external debt by creditors – on short, medium and long terms – reveals the fact that the preponderance of multilateral institutions has increased from 12.5 % at the end of the year 2008, to 13.8% on 31 of December 2009, as a consequence of the loans given by the International Monetary Fund and the EU, at the same time with the decrease of private sources (from 86.8% at the end of 2008 to 85.8% at the end of 2009). As for the classification by maturities, the long term external debt on December 31st 2009 was the most significant (69.9 %) within the category of the external debt on medium and long term, as a consequence of growth of the lateral with 8.2%.

At the end of 2009 the level of Romania’s public debt (internal and external) represented 23.7% of GDP, easily fitting in the 60 % limit, stipulated in the Maastricht Treaty. Nevertheless, it’s worrying the fast increasing rate of the public’s debt growth in GDP (with around 10% in one single year), which, in the absence of some proactive and sustainable reduction measures of budget deficit, can compromise in a few years its conformation with this criteria.

Public debt has increased almost five times its annual growth rate (+25.5% up to 13.5 bln Euro), the year 2009 marking also, the record of 5.7 bln Euro representing the balance of loans granted to Romania under the Stand-By Arrangement with the IMF.