Country Risk and External Debt Sustainability
There is an intricate relationship between the flow accounts in the balance of payments and the stock variation of debt liabilities and official reserve assets. Any current account deficit will lead to external capital inflows, a variation of official reserve assets, or payments arrears. External capital flows will not necessarily lead to an increase in debt liabilities. Non-debt creating flows such as Foreign Direct Investment and portfolio investment will finance the deficit without increasing the country’s indebtedness. A debt crisis will emerge when the country faces constraints in meeting its external financing requirements and when the debt structure becomes vulnerable to external shocks, including higher interest, shorter maturities, and shrinking access to capital markets. It is important to monitor liquidity and solvency ratios as well as the spill-over effects of regional developments, such as weaker trade markets, fluctuating commodity prices, foreign exchange and interest rate volatility, and rating agencies downgrading.
KeywordsExternal debt Solvency Liquidity Leverage Default Creditors Rescheduling Refinancing Debt restructuring
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