External Debt In Developing Countries Essay

When analyzing the potential of a country to service and pay back its external debt, there are two issues to be considered, the first one is solvency and the second is liquidity. Traditionally, the solvency indicator most widely used has been Gross External Debt as a percentage of GDP that in the case of South Africa is 30%. Taking into account the 24 most important world emerging economies South Africa ranks 11th (better than the average) in terms of Gross Financing Requirements.

Nevertheless, a much better measure to measure solvency is to use Net External Liabilities. Unfortunately, very few emerging countries use the IMF approved methodology for estimating external assets. A country may have increased its external debt but used part of it into foreign asset accumulation. In the case of South Africa it is very clear that many South African companies and individuals have increased their stock of assets abroad to diversify their investments, either through foreign direct investment or portfolio investment. Therefore, it is possible that its

The two most popular indicators today are the ratio of foreign currency reserves to some broad monetary aggregate and the ratio of foreign currency reserves to external short-term debt. The first one has the problem that the more develop and sophisticated is the domestic financial system, as it is the case of South Africa, the lower the ratio.

South Africa is not well ranked in either one, 8% of Reserves/M2, that is, ranked number 23rd, and 50% of reserves to external short term debt, that is, number 22nd. That means that either reserves are low or short-term debt is high. South Africa’s international reserves represent only around 6 billion US dollars, a low level when it is compared to other emerging countries of similar size like Argentina, with 32 billion or Poland with 28