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External Finance and Foreign Debt: A Study of the Transition Economies of Central and Eastern Europe

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Abstract

The empirics of Chapters 5–7 are centred on developing market economies, because these economies have been part of the world capital market for a long enough time to allow an application of growth models to the determinants and consequences of foreign capital. Other transforming economies have (re)joined international financial relations in the 1990s: the so-called transition economies of Central and Eastern Europe and Asia. This chapter deals with the determinants and the sustainability of foreign capital inflows in a sub-set of these economies.

Keywords

Foreign Direct Investment Transition Economy Capital Inflow Nominal Exchange Rate External Debt 
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Notes and References

  1. 1.
    However, note that in 1995 net capital inflows in Hungary and the Czech Republic are reported to have reached about 15 per cent of GDP.Google Scholar
  2. 2.
    Another reason to accumulate foreign exchange reserves is the need to meet large scheduled repayments of external debt (see Calvo, Sahay and Vegh, 1995, p. 17).Google Scholar
  3. 3.
    In early 1997, rumours of a new moratorium on foreign debt obligations by Bulgaria intensified.Google Scholar
  4. 4.
    ‘Dollarisation’ (that is, currency substitution) has been one of the early consequences of the removal of foreign-exchange restrictions in transition economies; however, there is evidence that the degree of dollarisation has fallen where successful stabilisation policies have been implemented (Sahay and Vegh, 1995).Google Scholar
  5. 5.
    See EBRD (1996); Temprano (1996).Google Scholar
  6. 6.
    The surge in capital inflows posed a number of macroeconomic and financial monitoring problems for the authorities in transition countries: see, among others, Begg (1996); Calvo, Sahay and Vegh (1995); Ize (1996); Siklos (1996).Google Scholar
  7. 7.
    In principle, FDI are not involved when creditworthiness is at stake. However, direct investment is highly responsive to the reform climate and to privatisations in transition economies. See Chuhan, Claessens and Mamingi (1993) on a distinction between the determinants of debt vis-à-vis non-debt capital inflows in Asia and Latin America.Google Scholar
  8. 8.
    We tried to capture the change in external conditions in a very rough way (with a time trend) but with no significant results.Google Scholar
  9. 9.
    This can also be true of other kinds of bilateral or multilateral assistance for which, however, it is more difficult to distinguish between concessional and non-concessional flows.Google Scholar
  10. 10.
    Debelle and Faruqee (1996, pp. 18-21) find that the fiscal surplus has a considerable (positive) impact on the current account.Google Scholar
  11. 11.
    Other types of non-debt inflows (equity) have been rather marginal in CEECs until 1995, and are neglected here.Google Scholar
  12. 12.
    Of course, this argument does not apply to foreign currency-denominated debt, which represents the largest share of foreign debt in CEECs.Google Scholar
  13. 13.
    The experience of the Czech Republic in 1997 could provide an example of this pattern. Another possibility is that an appreciation (depreciation) of the real exchange rate leads to a lower (higher) real cost of servicing the external debt if this is denominated in foreign currency.Google Scholar
  14. 14.
    Throughout this chapter, we use data on net foreign debt stocks (gross debt less foreign exchange reserves).Google Scholar
  15. 15.
    A complete list of empirical variables, their definitions and sources is in the Appendix (pp. 177-8).Google Scholar
  16. 16.
    See Nerlove and Balestra (1992). Notice also that no lagged dependent variable is present on the right-hand side of our regressions, so that a potential source of inconsistency of the fixed-effects OLS estimator is absent (Debelle and Faruqee, 1996, p. 11).Google Scholar
  17. 17.
    It should be mentioned that, given the still unsatisfactory quality of the statistics on transition economies, measurement errors may affect the estimates.Google Scholar
  18. 18.
    Following Begg (1996) we have tested whether the rate of change of the real exchange rate matters for net foreign borrowing in CEECs. We find the parameter never significant at the 10 per cent level.Google Scholar
  19. 19.
    It is true that fiscal discipline might be relaxed in the presence of large financial inflows; that a currency appreciation following a surge in capital inflows could negatively affect exports; and that net borrowing contributes to the rise of foreign debt, but these reverse causation effects tend to act with a lag and not between contemporaneous variables.Google Scholar
  20. 20.
    See Aizenman (1991). Milesi-Ferretti and Razin (1996a) argue that a high share of FDI improves the sustainability of current account deficits in developing countries.Google Scholar
  21. 21.
    We are abstracting from the severe limitations in the current evaluations of fiscal imbalance in transition economies (see Begg, 1996, p. 79; Buiter, 1996, pp. 29-39).Google Scholar
  22. 22.
    The growth rates are computed from export data expressed in current US dollars (see the Appendix on p. 178); in the case of Slovakia and the Baltic Republics, the growth rates are computed over 1993 through 1995.Google Scholar
  23. 23.
    Provided a fixed share of exports (P) is devoted to interest payments over an infinite horizon, and that these payments keep the debt—export ratio constant, one can writeGoogle Scholar
  24. 24.
    The data in Table 8.4, which are not adjusted for growth, show that even taking into account new net borrowing and partial cancellation or rescheduling of existing foreign debts (ruled out in our exercise), the actual ranking of net debt—export ratios in 1995 is not very different from that predicted by column (3) in Table 8.5.Google Scholar

Copyright information

© Stefano Manzocchi 1999

Authors and Affiliations

  1. 1.University of PerugiaItaly

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