The Risk Management Of Asset And Liabilities By Developing Countries E

The Risk Management Of Asset And Liabilities By Developing Countries The risk management of assets and liabilities by developing countries. Greater access to the international financial markets has bestowed many benefits on developing countries, but it has also exposed them to the vicissitudes of these markets. In addition to the macroeconomic challenges posed by large, potentially volatile flows, the sizable external foreign currency debt of many developing countries makes them vulnerable to swings in international exchange rates and interest rates and, often, they are tempted to speculative currency attacks. Indeed, prudent macroeconomic policies have at times been compromised by the fiscal consequences of losses associated with these exposures. Most recent of such policies is the one embarked upon by Russia.Russia had defaulted on domestic debt, devalued the rubble and frozen payments on some previous Soviet-era commercial debt. The U.S and a few European banks, which lost some $10 billion to the debt default alone, vowed never to go near Russia again. Yet, it is striking to learn through Business Week magazine that due to a change in macro-economic policies, Russia has been able to have some their defaulted debts forgiven. Now many of the same banks that vowed not to do business in Russia are hailing the administration of this country's first step toward a return to international bond markets in the form of a massive issue of restructured commercial debt. These financial pundits are hoping for an unprecedented economic rebound. The main economic and financial initiative that has encour aged investors is that Russia has the best performing fixed income market in the world for this year as well as last year. J.P. Morgan's Emerging Markets Benchmark Index reported this performance. Other areas of policy changes involved the devaluation of the rubble at a time when oil prices have surged. Russia has also recently restructured $32 billion in soviet- era commercial debt. Banks wrote off $10.6 billion and Russia issued two new trenches i.e. an $18.2 billion30-year issue and a $2.8 billion10-year issue for the balance. As other defaulted nations looked on, they find themselves in not so fortunate a position, and as the struggle for finding economic policies that will woo their creditors continues, they find themselves in unfortunate uncompromising positions. According to Newsweek, exposure of developing countries to currency risk can be broadly gauged by the amount of external public debt they have incurred. In 1996, the outstanding stock of sovereign debt issued or guaranteed by developing countries amounted to $1.5 trillion, or 25 percent of their total GNP and to 300 percent of their foreign currency reserves. Roughly one-half of their external debt was exposed to foreign interest rate risk: one-fifth of this was short term (maturities of less than one year), and two-fifths of the remaining long-term debt was at variable rates. During the past two decades, a number of emerging markets specifically from the developing countries have been hurt by adverse movements in exchange rates and international interest rates. In the early 1980s, the debt-servicing burdens of some countries in Africa, Southeast Asia, and Latin America were severely affected by the dollar's appreciation, a worldwide increase in interest rates, and a decline in commodity prices. Several Asian countries saw significant increases in their debt burdens in the early 1990s because of their large, unhedged exposures to Japanese yen. A third of the increase in the dollar value of Indonesia's external debt between 1993 and 1995, for example, was attributable to cross-currency movements, particularly the steep appreciation of the yen. At the time, 37 percent of Indonesia's external debt was denominated in yen, while about 90 percent of its export revenues were denominated in dollars. (The depreciation of the yen in 1996 offset some of the losses in curred by these countries.) A report by the Organization for Economic Cooperation and Development claimed that maturity profile of public debt contributes as much as the total volume of the debt to a country's vulnerability to external shocks, such as that experienced by Mexico. Mexico's public debt was relatively low by Organization for Economic Cooperation and Development (OECD) standards, -51 percent of GDP, compared with an average of 71 percent for the OECD countries. The Mexican crisis underscored the difficulty and cost of refinancing a