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Tackling China’s Debt Problem: Can Debt-Equity Conversions Help?

InvestAdvocate — Wed, 27 Apr 2016 05:33:42 +0000

Posted on April 26, 2016 by iMFdirect

By James Daniel, José Garrido, and Marina Moretti

China’s high and rising corporate debt problem and how best to address it has received much attention recently. Indeed, corporate debt in China has risen to about 160 percent of GDP, which is very high compared to other, especially developing, countries.

The IMF’s April 2016 Global Financial Stability Report looked at the issue from the viewpoint of commercial banks and resulting vulnerabilities. Its analysis suggests that the share of commercial banks’ loans to corporates that could potentially be at risk has been rising fast and, although currently at a manageable level, needs to be addressed with urgency in order to avoid serious problems down the road. Indeed the success in addressing this issue is important for China’s economic transition and, given its size and growing global integration, the world’s economy at large.

Encouragingly, the authorities have announced that they are focusing on the problems of excessive corporate debt and the resulting burden on banks and, indeed, the whole economy. Media reports have reported on two specific techniques to tackle the country’s debt problems: (1) converting Non-Performing Loans (“NPLs”) into equity and (2) securitizing NPLs (that is repackaging bank loans into marketable securities) and selling them.

The Fund staff’s international experience provides some useful lessons on these techniques. This blog, and the associated note, summarizes our findings.

The key message is that while such techniques can play a role in addressing these problems and have been used successfully by other countries, they are not comprehensive solutions by themselves. Unless they are carefully designed and part of a sound overall framework, they could actually worsen the problem, for example, by allowing “zombie” firms (non-viable firms that are still operating) to keep going. Banks generally also don’t have the expertise to run or restructure a business and debt-equity conversions could create conflicts of interest—banks may keep lending to a now-related party.

Thus, getting the design right is critical:

Debt-equity conversions should convert debt only of viable firms in the context of operational restructuring plans for the firms (which may include changing management), at fair value, and with banks holding the equity for a limited period only.
NPL securitization should encompass a diversified pool of NPLs, with banks keeping some residual financial interest (“skin in the game”), under a legal and operational framework that will allow owners of distressed assets to force operational restructuring of firms and obtain the best value from those assets.

Moreover, for these techniques to help address the systemic problem of excessive corporate debt and impaired bank loans more generally, they need to be part of a comprehensive, system-wide plan. Such a plan should, in addition to addressing the social consequences (especially to support laid-off workers), involve the following:

Assessing the viability of distressed firms, and restructuring the viable ones and liquidating the nonviable ones
Requiring banks proactively to recognize and workout NPLs
Burden sharing among banks, corporates, institutional investors, and the government
Enhancing the framework for corporate restructuring, including the Enterprise Insolvency Law
Developing distressed debt markets.

Such a comprehensive plan would help allocate resources—labor, capital, and credit—to more productive uses and thus support, together with the right mix of macroeconomic policies and structural reforms, China’s broader economic rebalancing towards a more sustainable growth model.

Culled—-iMFdirect

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The Broader View: The Positive Effects of Negative Nominal Interest Rates

InvestAdvocate — Mon, 11 Apr 2016 05:06:51 +0000

Credit: sputniknews.com

Posted on April 10, 2016 by iMFdirect

By Jose Viñals, Simon Gray, and Kelly Eckhold

We support the introduction of negative policy rates by some central banks given the significant risks we see to the outlook for growth and inflation. Such bold policy action is unprecedented, and its effects over time will vary among countries. There have been negative real rates in a number of countries over time; it is negative nominal rates that are new. Our analysis takes a broad view of recent events to examine what is new, country experiences so far, the effectiveness of negative nominal rates as well as their limits and their unintended consequences. Although the experience with negative nominal interest rates is limited, we tentatively conclude that overall, they help deliver additional monetary stimulus and easier financial conditions, which support demand and price stability. Still, there are limits on how far and for how long negative policy rates can go.

Why are central banks using negative policy rates?

Once policy rates are cut to what used to be known as the ‘zero lower bound’, central banks can employ unconventional monetary policy measures to provide further stimulus if real interest rates are still above the levels consistent with price stability and full employment. Negative nominal policy interest rates are the latest addition to this unconventional toolkit. Six central banks so far have introduced negative rates that apply to some amount of the cash balances commercial banks hold with the central bank (Table 1). Negative rates aim to encourage the private sector to spend more and support price stability by further easing monetary and financial conditions. For smaller open economies, negative rates can also help discourage capital inflows and reduce exchange rate appreciation pressures.

Click here to view full article “The Broader View: The Positive Effects of Negative Nominal Interest Rates”

Culled—-iMFdirect

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Capacity Development in Africa: the Faces behind the Numbers

InvestAdvocate — Sat, 09 Apr 2016 06:19:55 +0000

Credit: en.wikipedia.org

Posted on April 7, 2016 by iMFdirect

By Carla Grasso

If there’s one thing all economists can agree on, it’s the importance of numbers. Without good data, it is difficult to assess how an economy is performing and formulate smart policies that help improve lives.

In little over twenty years, the southern African country of Mozambique has gone from having no national accounts or consumer price index to creating one of the leading statistical agencies in Sub-Saharan Africa.

I saw firsthand Mozambique’s progress in collecting data on my recent trip to Africa. It was my first trip there as an official representative of the IMF. I met with Isaltina Lucas, the then-President of Mozambique’s Institute of Statistics (and now Vice-Minister of Economy and Finance), who told me about the government’s impressive strides in compiling key economic statistics—thanks, in part, to the IMF.

Over the course of my 10-day visit in early March, I saw many more instances of how IMF technical assistance and training—which together we call “capacity development”—is helping policymakers in sub-Saharan Africa take charge of their own economic future.

Tapping the experience of peers

In Tanzania, for example, I witnessed a workshop organized jointly by the IMF and the central bank, where officials from across the region discussed their own countries’ experiences with expanding access to finance and exchanged views on how to deal with financial vulnerabilities that are emerging as a result. Many participants emphasized the importance of this type of experience-sharing—known as “peer-to-peer learning”—in building capacity.

We are hearing more and more that the knowledge-sharing that takes place outside formal courses is important for capacity development. So we have been exploring ways to cultivate peer learning and support, both in person and online. Through such platforms, policymakers facing similar challenges can not only learn from each other but also set common policy goals.

Such efforts are beginning to bear fruit. Take, for example, Senegal, which is successfully using peer learning to implement its new development strategy with the goal of becoming an emerging market economy within the next two decades. Senegal is drawing on the experience of policymakers in Cape Verde, Mauritius, and Seychelles to introduce tax identification numbers, set up credit information bureaus, and develop tourism and special economic zones.

Click to read full article “Capacity Development in Africa: the Faces behind the Numbers”

Culled—— iMFdirect

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