India’s External Debt – June 2015
India’s external debt as of end June 2015 stood at USD 482.9 billion, up by 1.8% from levels of USD 475.8 billion seen in March 2015 and by 6.6% from levels of USD 453.1 billion seen in June 2014. Adjusting for valuation gains of the USD against the INR and other currencies, external debt would have been higher by USD 10.1 billion during the quarter. Table 1 Commercial borrowings formed 38.4% of external debt followed by NRI deposits at 24.8% and short term trade credit at 16.6%. Commercial borrowings rose 2.5% qoq and 18.9% yoy while NRI deposits rose 4.1% qoq and 12.8% yoy.Table 2.
FIIs investments in government bonds have been restricted to bonds of minimum maturity of three years and that has resulted in FIIs investments in treasury bills coming off leading to fall in short term external debt ratios. Table 3. Short term debt has come off to USD 84.4 billion as of June 2015, down 0.4% qoq and 6.3% yoy. Short term external debt to total external debt was at 17.5% from 17.9% seen end March 2015 and short term external debt to foreign exchange reserves was at 23.7% from 24.8%. Short term external debt of residual maturity of less than one year was 38.3% of total external debt and 51.9% of foreign exchange reserves. India’s total external debt to GDP was at 24% from 23.7% and to foreign exchange reserves was at 73.7% from 72%. Table 4
India has to keep down its short term debt to prevent global shocks from affecting its currency and reserves position.
India’s External Debt – March 2015
India’s External Debt as of end March 2015 stood at USD 475.8 billion, up by 6.6% from levels of USD 446.3 billion seen in end March 2014. Adjusting for Valuation Gains of the USD against the INR and other currencies, external debt would have been higher by USD 45.7 billion at USD 492 billion, a rise of 10.2% yesr on year. The USD has appreciated against most the INR and other currencies since March 2014. Read our analysis on USD strength.
The bright part of the external debt numbers is the improvement in ratios of short term external debt, which is debt due in one year or less period of time. Short term external debt fell 7.6% year on year from USD 91.7 billion to USD 84.7 billion. Short term external debt of residual maturity of less than one year was USD 185.2 billion, which is 38.9% of total external debt. This ratio is down from 39.6% seen last year. In terms of short term external debt of residual maturity of less than one year to foreign exchange reserves, the ratio has improved to 54.2% as of March 2015 from 57.4% as of March 2014.
Improving short term external debt ratios places less pressure on the INR at times when there is risk aversion in global markets. Lower the short term external liabilities, lower the risk of high capital outflows in times of stress.
In terms of major components of external debt, commercial borrowing and NRI deposits form 38.2% and 24% of total external debt. Commercial borrowings and NRI deposits rose 21.7% and 10.9% year on year respectively leading to the 6.6% rise in total external debt. India has been witnessing rising external commercial borrowings and more flows from NRIs over the last two years. Table 1. In fiscal year 2013-14, FCNR B deposits of USD 26 billion accounted for most of the USD 33 billion inflows from NRI deposits. RBI had opened a FCNR B swap window for banks in September 2013 to attract FCNR B flows to prevent INR depreciation. (Read our analysis on FCNR B swap window).
External debt ratios have deteriorated since 2007-08
India’s external debt has more than doubled from levels of USD 224 billion seen in 2008 to levels of USD 475.8 billion as of end March 2015. Fx Reserves as % of external debt has deteriorated from 138% of external debt to 71.8% of external debt as increase in fx reserves has lagged the increase in external debt. Table 2. Fx reserves have increased from USD 304 billion seen in 2008 to USD 341 billion as of March 2015. Deterioration in levels of external debt as % of fx reserves is a worry when there is capital flight and this will lead to a sharp fall in value of the Indian Rupee. Fx reserves have increased from USD 300 billion to USD 340 billion over the April 2014-March 2015 period. RBI will have to buy USD to shore up fx reserves to improve the external debt to fx reserves ratio.
In fact the INR has depreciated from levels of Rs 40 to the USD as of end March 2008 to levels of Rs 63.57as of 30th June 2015. A good part of this fall can be explained by India’s deteriorating external debt position. Ratio of external debt to GDP has moved up from levels of 18% to 23.8% in the 2008-2015 period. Ratio of short term debt to foreign exchange reserves has moved up from 14.8% to 24.8%.
Tutorial on External Debt
Build up of external debt in fast growth economies is accompanied by a rally in asset and currency markets. However when external debt becomes unsustainable, the repercussions are severe with economic contraction and sharp fall in asset and currency values. Over the years, the boom bust cycle led by external debt has panned geographies. South America in the 1980’s, South East Asia in the 1990’s and Iceland in the 2000’s. The build up of external debt of a country leads to an asset boom as foreign money seeking high returns go into speculative asset classes. When the asset bubble bursts, the foreign money tries to find its way out of the country leading to panic selling of assets. Central banks have grappled with external debt problems and have resorted to various methods including sterilisation of flows, taxes on flows and capital controls. Some of the methods adopted by central banks have worked and some have not but the underlying rise and fall in asset prices have not been contained.
What is external debt?
External debt is the money owed to non residents in the form of interest and principle payment. Debt securities including bonds and money market instruments, deposits, loans and advances and trade credits are forms of external debt. External debt is categorised into long term and short term. Long term external debt is any debt that has maturity of one year or more while short term external debt is any debt that has maturity of one year or less.
Trade credits, money market securities, short term loans, foreign currency deposits and debt/loans with residual maturity of one year and below are all categorised as short term debt.
How to look at external debt?
External debt is looked at in terms of external debt to GDP ratio, net interest payment to GDP ratio, short term external debt to total external debt ratio and external debt to foreign exchange reserves ratios. The higher the ratios the higher the risk an economy is running if there is a run on the currency. The external debt indicators for all the countries that suffered crisis have been at higher levels.
The South American debt crisis in the 1980’s saw external debt to GDP ratios for the countries in the region rise by multi fold times. South American countries defaulted on their external debt due to the sharp rise in debt levels.
The South East Asian crisis in the 1990’s saw countries in the region devaluing their currencies and imposing capital controls to stem the crisis of capital outflows. Countries such as Thailand, Malaysia, Indonesia, Korea had all seen their short term external debt to total external debt ratios rise significantly to over 60% and when capital started moving out the countries found it impossible to service the short term debt.
Iceland, which was affected by external debt crisis in 2008, saw its external debt go over 1000% of GDP and its net interest payments on debts go close to 20% of GDP. Iceland had to be bailed out by the IMF as it faced an economic collapse due to the burden of its external debt.
All the crisis ridden countries had external debt much higher than foreign exchange reserves.
What are levels of external debt ratios to get worried about?
There is no single threshold level of external debt that signals destabilising signs. A research done by BIS (Bank of International Settlement) shows that net external debt higher than 50% of GDP and net interest payments higher than 3% of GDP are levels to worry about. The lower the short term debt to external debt ratio the better as there is less pressure on a country to depend on capital flows to service short term debt. Short term debt at over 50% of total external debt will exert pressure on the country’s ability to service the debt. Foreign exchange reserves should be able to cover a few months of imports as well as repayment of short term debt.