Credit rationing and macroeconomic adjustment in Latin America

The Qnarterly Review of Economics and Furance,Vol. 33, No. 4, Wmter, 1993, pages 325-342 Cqyight Q 1993 Trusteesof the Universityof lliinok AU rightsof reproductionin any form reserved. ISSN 00355797

Credit Rationing and Macroeconomic Adjustment in Latin America DUANE W. ROCKERBIE University of Lethbridge

This research attempts to provide an answer to the important question of whether sovereign baowers of developing countries are credit rationed in international capital markets. A~?er defining the type of credit rationing to be tested an econometric technique is developed and tested with the results casting doubt on the extent of credit rationing fm 12 of 13 Latin American a!eveloping countries over the sample period 1945-l 988. The test is limited in that it will not detect credible threats of credit rationing followed by macroeconomic adjustments to bring about an equality of domestic investment and national savings. This form of ex ante credit rationing could still be pervasive. Nevertheless it would appear that on the whole,Latin American cmmtrk are quickly able to adjust to anticipated shocks by a combination of policies to reduce the investment-savings gap.

The “debt crisis” of 1982 and subsequent

tightening

of credit extended

to lesser

developed countries since then has stimulated research on the sovereign borrowerprivate creditor relationship. The magnitude of research in this area was so great that as early as 1985 survey papers appeared to digest and interpret the growing volume of research.’ Different types of financial instruments and arrangements have emerged to address the mounting LDC debt problem: debtequity swaps, exit bonds, Brady-type rescheduling arrangements to name a few. Research has accelerated in analyzing the effects of many of these debt-financing instruments. Some of this research was devoted to the conditions precluding credit rationing on the part of private lenders and why credit rationing may be an optimal outcome for both borrower and lender. Notable research works in this area are Keeton (1978), Eaton and Gersovitz (1980), Stiglitz and Weiss (1980), and Kletzer (1984). Also a good summary can be found in Baltensberger (1986). Eaton and Gersovitz (1980) also provided an empirical test for credit rationing and found it to be quite prevalent although a subsequent test by Morgan (1984) with a larger sample found the results less conclusive. This article attempts to estimate the extent of credit rationing for 13 Latin American debtor countries over the period 1965-1988. However in order to understand exactly what is meant by credit rationing, it is absolutely necessary to define what 325

QUARTERLY

326

REVIEW OF ECONOMICS

it is in the context

of international

debt markets.

a definition

of credit rationing

In domestic

credit markets, various definitions

and tested. These

(1986).

at all when all borrowers specific sovereign specific

cannot

rate. Type I rationing

debt markets

borrower.

have been suggested

Stiglitz and Weiss (1980),

rate. Type II rationing

borrow their desired amounts takes an aggregate view. These

by acknowledging

of all sovereign

sovereign

(1978),

can take two forms. Type I rationing

face the same interest

takes a borrower-specific

total demand

of credit rationing

receive their desired loans while others receive no loans

all borrowers

interest

II rationing

articles have not provided

sound or statistically measurable.

in Keeton

Here credit rationing

occurs when some borrowers some, or perhaps

Previous

which is theoretically

are best summarized

and Baltensberger

AND FINANCE

view of rationing

definitions

while Type

is applicable

while Type II rationing

This article will attempt

when

can easily be adapted

that Type I rationing

borrowers,

occurs

at any borrower-

to estimate

applies

the extent

to

to the to each

of Type II

credit rationing. Jaffee

and Modigliani

categories

either a temporary disequilibrium.

adjustment

the investment-savings expected

supply. Statistical rationing

and Monfort

a further

distinction

between

credit demand

disequilibrium

can only be identified

within the sovereign

gap.* A permanent profits

for a summary

cases of credit rationing:

and supply, or

economy

occurs

the lender

demand

may give an indication

or permanent

to eliminate

when

rate which does not equate

tests for the speed of adjustment

can be

after the fact by a

of demand

borrower’s

disequilibrium

at an interest

is of the temporary

(1980)

which adds two more Credit rationing

and supply or a permanent

of price to bring about a new equilibrium

a rapid structural maximizes

make

to Type I and Type II rationing.

disequilibrium

A temporary

rapid adjustment

credit

(1969)

of credit rationing

and

as to whether

variety, see Gourieroux,

Laffont,

of such tests. In summary we have a total of four

temporary

Type I or Type II and permanent

Trpe I or Type

II. Theories

of credit rationing

1980’s.

Hodgman

profits

(expected

(1960)

profits because

result was a lender some critical the interest extent

to the debt problems

a model

borrower

of a lender

interest

rate. At the critical

rate any further

interest

without increasing

return

of LDCs in the

who maximized

default was one possible

supply curve which became

that the expected

bending

are not unique

developed

from further

supply curve, in itself, is necessary

vertical,

the probability lending

solution).

then backward

rate, the borrower

The

bending

at

could not raise

of default

became

but not sufficient

expected

negative.

to such an A backward

to generate

permanent

Type II credit rationing. Up to Stiglitz

and Weiss (1980),

relied on a backward creditors pected

bending

are maximizing return

an interest

expected

from an investment

rate which maximizes

If a potential

borrower

models

of Type II permanent

supply curve argument. profits project. expected

credit

and borrowers

are maximizing

The optimal outcome

is the lender

profits and also acts as a screening

offers to pay an interest

rationing

In the Stiglitz and Weiss model,

rate above the optimal

their exsetting device.

interest

rate,

CREDIT RATIONING AND MACROECONOMIC ADJUSTMENT

327

he is immediately revealing himself as a bad risk and thus will not receive a loan. Thus some proportion

of borrowers will not receive loans which is a Trpe I rationing

solution. It is not difficult to see that if the loan application process involves some cost to the borrower, perhaps by way of a fixed fee, Type I credit rationing will never occur. It is quite likely that the screening interest rate used by creditors can be deduced by bad risk borrowers by observing the equilibrium interest rate negotiated by good risk borrowers. They might also ask those who did not receive loans (bad risks) what. interest rate they offered to pay. Regardless of the method it should not take very long for bad credit risks to learn the optimal screening

interest rate. At the optimal

screening rate bad risks know they will not receive the required amount of funds for their investment project. Were they to offer a higher interest rate, they will be immediately identified as bad risks, which will exclude them from any further credit applications. If the application process is costly, a rational bad risk borrower would simply not apply for credit. If bad risk borrowers never apply for credit, then credit rationing is an impossibility: only good risks will receive loans at the screening interest rate. Essentially bad risk borrowers ration themselves. At the critical screening interest rate we will still observe demand equal to supply. Under this framework, permanent Type I credit rationing may be impossible to isolate statistically since we cannot determine who and how many discouraged, or rationed, bad risk borrowers do not ask for loans. More recent theoretical articles dispute the likelihood of credit rationing as the optimal outcome of a bargaining process. Bulow and Rogoff (1989) and Kohler (1986) construct game-theoretic models of the loan negotiation process and show that the Nash solution is a constant rolling over of old debt to new debt. Both credit rationing and outright default are non-optimal solutions. Eaton and Gersovitz (1980) developed adynamic programming model where both lender and borrower are maximizing expected utility. Unfortunately the complexity of the model prevented its explicit solution. Using a simplified approach, the authors were able to show that permanent Type II credit rationing was one feasible solution if default risk is increasing in loan size. They then utilize a disequilibrium demand-supply model with switching regimes (credit rationed and not credit rationed) which provides probabilities that an individual sovereign borrower was being credit rationed at a given time. Many of these probabilities are high enough to conclude that credit rationing was a prominent occurrence for the years 1970 and 1974. Subsequent research by Morgan (1984) using a larger sample showed these results to be unstable and the credit rationing probabilities to be lower than those estimated by Eaton and Gersovitz (1980). Theoretical and empirical attempts to justify and isolate periods of credit rationing are mixed. In the next section a new test for permanent Type II rationing is devised and tested on 13 Latin American debtor countries.3 Despite some weaknesses in the test the results are quite unambiguous and suggest that permanent Type II credit rationing was not prevalent over the period 1965-1988. The last section provides a summary of the paper.

328

QUARTERLY REVIEW OF ECONOMICS AND FINANCE

A TEST FOR PERMANENT TYPE II CREDlT RATIONING In domestic credit markets, credit rationing has always been difficult to test for due to its disequilibrium

nature. When quantity demanded is not equal to quantity supplied

at the market rate of interest, formal identification

and estimation of separate demand

and supply functions is difficult. This problem is particularly acute when subperiods of credit rationing cannot be observed from sample data. Several ad hoc econometric techniques allow the researcher equilibrium

to segment the sample into periods of rationing and

(see Judge, Griffith, Hill, Lutkepohl,

and Lee (1985),

pp. 638-640)

by

observing whether the interest rate is rising or falling over a period of time within the sample. This allows identification and estimation of a demand curve using the rationing observations alone. It is not likely that this method would be appropriate when applied to LDC sovereign debt markets since such a test requires an atomistic market with loan contracts being agreed to continuously, a characteristic not common in international sovereign debt markets4 This article uses a proxy for sovereign debt demand, namely, the excess of anticipated domestic investment over anticipated national savings. Ex ante investment and savings equations are developed and estimated over the period 1965-1988 under the assumption that the representative individual faces a constrained information set. The test involves comparing the estimated ex ante demand for external debt with the actual amount of new credits received from lenders. Any persistent deviation between the two may indicate unanticipated credit rationing and/or an inability to conduct appropriate

macroeconomic

adjustment

policies to reduce the investmentsavings

gap. The test will not be able to detect credible threats of credit rationing, but rather only instances of actual credit rationing. For example, if a sovereign borrower expects to be credit rationed in the next period, itwill attempt to initiate appropriate structural adjustments in its economy to eliminate any gap between domestic investment and national savings. If these adjustments can be performed quickly enough (by means such as a devaluation of the exchange rate), a situation of credit rationing ex post can be avoided. If the necessary structural adjustments cannot be made quickly or if the sovereign borrower does not anticipate to be credit rationed, the testwill detect credit rationing.

TJdEIluvE!sTMENT

AND SAVINGS FUNCTIONS

The investment function is an accelerator model incorporating a partial adjustment mechanism (Fry 1989). The independent variables are the lagged investment/GDP ratio ((I/Y) t_r), growth rate of real GDP (G) , a risk-inclusive real rate of interest (R) , real exchange rate (REX), terms of trade (IT), and the debt/GDP ratio (D/Y). Detailed definitions and sources are contained in the appendix.

CREDIT RATIONING AND MACROECONOMIC ADJUSI’MENT

329

The risk-inclusive real interest rate (R) is constructed by subtracting the ex post U.S. inflation rate from the average annual nominal sovereign borrowing rate ob tamed from World Debt Tables. The nominal borrowing rate includes a borrower-specific risk premium if lenders are not risk-neutral. The U.S. inflation rate, rather than the domestic inflation rate, was used since most foreign debt is denominated in U.S. dollars. Increases in the real cost of borrowing should reduce the investment/GDP ratio. The real exchange rate (REX), when normalized, measures the extent to which the nominal exchange rate is over or undervalued in terms of U.S. currency. If the real exchange rate is greater than one, the nominal exchange rate is overvalued creating expectations that the nominal exchange rate will depreciate. A depreciated nominal exchange rate increases the price of importing capital goods to use in production, thus investors may increase capital inflows before the expected depreciation occurs, potentially raising the investment/GDP ratio. If borrowing LDGs can be assumed to specialize in labor-intensive

goods for

export, an increase in their terms of trade (export prices/import prices = TT) may increase their investment/GDP ratio. An increase in prices of export goods will encourage higher production levels entailing a higher demand for labor, the intensive factor. With more labor involved in production, the return to capital will increase and investment will be stimulated. The debt/GDP ratio (D/Y) can affect the investment/GDP ratio through two channels. First, if foreign debt is used to add to the domestic capital stock, the resulting high rates of GDP growth may force an increase in the savings rate in order to maintain higher capital stocks, while still enjoying a higher level of consumption. In this case the investment/GDP ratio would increase. On the other hand, the large amount of funds required to service the higher debt/GDP ratio may create a crowding-out effect through higher tax rates and interest rates. In this case the investment/GDP ratio would fall. The net effect will be positive (negative) if the marginal product of the new foreign debt is higher (less) than the interest rate it demands. The investment function to be estimated is summarized by the equation

I/y=j-6-1, it,Ii_,,&_I.&,, &-I,c;lW

(1)

where variables on the RHS of Equation 1 are assumed to be in the representative individual’s information set at the current time t. The average propensity to save (S) is postulated to be a function of the growth rate of GDP (G), the risk-inclusive real rate of interest (R) , the change in real income due to terms of trade changes (TTY), the domestic inflation rate (n), the debt/GDP ratio (D/Y), and the lagged savings rate (S,1). Detailed descriptions and sources of each variable appear in the appendix. Fry and Mason (1982) develop a life-cycle model of savings behavior where the savings rate is a positive function of the rate of real income growth if the age at which the mean level of consumption is reached is greater than the age at which the mean

330

QUARTERLY REVIEW OF ECONOMICS AND FINANCE

level of real income is reached. If age groups are evenly distributed, an increase in real wealth will increase total income by more than the increase in total consumption. The risk-inclusive real rate of interest (R) is the same rate used in the investment function. This rate is thought to represent the intertemporal At high (low) rates, savings will increase

price of consumption.

(fall). A higher risk-inclusive real rate of

interest also raises the cost of using additional foreign debt to maintain capital stocks, perhaps necessitating

a higher savings rate.

Savings decisions will also be sensitive to change in real income due to changes in the terms of trade. Real income is defined asY + x(Px/Pm - 1) where x is exports and Px/Pm is the terms of trade. The terms of trade variable (TTY) captures the change in real income due to changes in the terms of trade: TTY= [A(Px/Pm)/(Px/Pm),r] (x,/Y-l).

An increase in real income due to changes in the terms of trade should

raise the savings rate. The debt-GDP ratio (D/Y) could be a preliminary indicator of imminent government action to reduce the debt overhang on the economy. Policies such as future devaluations, future tax increases, etc. are captured by this variable. The effect of the debt-GDP ratio on the savings rate is ambiguous because, while future devaluations will reduce real income thereby reducing the savings rate, a higher level of current borrowing may necessitate future tax increases causing a higher savings rate today. Stockman

(1981)

using a discrete infinite

time model showed that a positive

inflation rate (n) reduced the optimal capital stock for producing firms, resulting in a corresponding

fall in savings. On the other hand, MacRinnon

(1989) contradicts

this result in a three period model by showing that a positive inflation rate is a tax on corporate dividends which makes it optimal to increase retained earnings. The overall effect is ambiguous. As was the case with the investment function, the savings rate is likely to exhibit lagged adjustment towards the optimal savings rate, thus a lagged dependent variable is included. The savings equation is summarized by

where the bracketed

terms are those variables assumed to be in the representative

individual’s information

set at the current time t.

The investment and savings equations were estimated using OLS for 13 Latin American LDCs over the period 1965-1988. The results appear in Tables 1 and 2. Independent

variables were dropped from the regression if their &statistic was less

than one and the adjusted R* increased after m-estimation. Serial correlation was detected in several of the estimated equations using Durbin’s h test and hence corrected. A single asterisk denotes statistical significance at the 95 percent confidence level (two-sided). A double asterisk denotes statistical significance confidence

level.

at the 90 percent

CREDIT RATIONING AND MACROECONOMIC ADJUSTMENT

331

Tabb1. RESULTS OF ESTIMATED INVESTMENT EQUATIONS: 1965-1988 Argentina

-.495*

.97a*

Dominican Republic

-.4%7

Ecuador

-.97a*

Guatemala

-.632*

Honduras

.461*

Mexico

.384*

Panama

.352**

.044**

0.864

.929*

0.579 0.676

.035

-7.18,

.002**

.782*

.089*

.336*

0.756

.480*

0.670 0.545

-I3.52* -.831L

-.351 -430.16*

.253*

.075*

.270*

0.875

-.044*

-.581f

.224*

Uruguay Venezuela

.423*

a7.11**

.056*

Paraguay Peru

-.027**

.864*

0.811

.867*

0.894

.506*

0.545

.6808

-1.31*

*indicates statistical significance

0.855 0.682

at 95 percent confidence.

**indicates statistical significance #

0.966

.063*

Costa Rica

Noti

-.021

-.894*

.161**

Brazil

at 90 percent confidence.

is adjusted for degreea of Freedom.

The fits for the estimated investment equations varied considerably. The adjusted

R2'sranged from a high of 0.966 for Argentina to a low of 0.545 for Honduras and Peru. Generally the goodness of fit appeared to be positively related to the degree of development of capital markets within the country in question. The most frequently occurring predictors were the lagged growth rate, the terms of trade, and the lagged investment-GDP ratio. The adjustment speed of investment to its desired level ranged from a low of 0.0’7 for Costa Rica to highs of 1.0 for Honduras and Mexico, with most Table 2.

FWXJLTS OF ESTIMATED SAYINGS EQUATIONS: 1965-1988

couutry

&Y&l

n

G-1

WA

D/%-l

-1.51*

Argentina

st-1

.325*

.556** -.815*

.560

-.092**

.399*

Costa Rica

.397**

.322

.148

,023

.492*

Dominican Republic

.213 .586*

Guatemala

-.423** .524*

.834*

Panama Paraguay Peru U~guaY Venezuela Noti:

.175

.894*

.105*

-.I00

.481*

.149*

.432*

-.104*

.344*

.356*

.819*

.059* .388*

-.567**

-.076*

.34s*

-.551*

-.211*

.833*

.317

.572* -.520*

.450*

-.514*

*indicates stadstical significance

at95 percent confidence.

**indicates statistical significance

at 90 pcrccnt conlidence

@ is adjusted for degrees of freedom.

-.186*

.597*

.018

0.814

-.092**

0.776

.099

.716* .316*

Mexico

ti 0.892

.013*

.764*

Ecuador

S-I

.459*

Brazil

Honduras

inft

0.631 0.700

-.115*

0.890 0.906

-.054*

0.808

-.171**

0.670

0.851 0.388

.02 1

0.422

.288*

0.971

332

QUARTERLY REVIEW OF ECONOMICS AND FINANCE

coefficients

indicating

of capital markets investment.

sluggish

adjustment

within the countries

Costa Rica, the Dominican

low adjustment

speeds5

Again the stage of development

likely determines Republic,

the speed of adjustment

Panama,

and Paraguay all have very

speeds and are also among the poorest and least developed

the region. All other variables showed the expected Two interesting points concerning the lack of statistical

significance

the lagged debt-GDP

the investment

equations

debt negotiated

observed

suggesting

in these countries

the

that the high levels

is consumption

This result may not be that surprising

by sovereign

in

should be noted. First

of the lagged real growth rate of GDP indicates

ratio does not appear to be an important

the level of investment.

countries

signs where statistically significant_

real growth in these LDCs is not related to investment, of real growth traditionally

of

led. Second,

factor in determining since much of the new

LDCs is used to retire old debt, rather

than to stimulate

new investment. The adjusted for Venezuela

R2'sfor

the estimated

savings equations

to a low of 0.38 for Peru with most others

The coefficient

on the lagged savings rate indicated

its desired

level only in the cases of the Dominican

Paraguay.

The

inflation

most prominent

rates with generally

predictors

ranged from a high of 0.97 being around

of savings to

Republic,

Mexico,

were the current

positive signs, the debt-GDP

Ecuador,

and lagged

countries

sampled,

positive in each case (albeit small in magnitude). suggests that individuals the inflation

may anticipate

rate indefinitely

distant future, becomes

intolerable.

finance

the anticipated

are in current

thinking

which may stimulate

money income income,

domestic

perfect;

Second,

out of these countries. artificially mobility

include

tax is collected

rate, the actual taxes collected

are

in the previous year when increase

may not be an accurate

in after-tax wealth

of the true after-tax

on the ability to freely move capital in and

creating

rate differentials

rates (Cumby

to the

with the rest of the world may not be

rate systems, overvalued

of return

insensitive

First, the rate of return

measure

These usually consist of taxes on foreign

real interest

savings to

there could be a strong

the savings rate is completely

constraints

of dual exchange

of real exchange

increase

for the previous year, but the tax payments

capital market linkages

low real rates

current

Income

This could be for several reasons.

there may be artificial

maintenance

More realistically

smaller than anticipated

countries

risky real rate of borrowing.

Equivalence

cannot

savings.

on savings used in the estimations rate of return.

may increase

This is the same as an unexpected

For four of the thirteen

authority

rates of inflation.

units of money. With a high inflation

was earned.

inflation

tax. At some point in the not too

individuals

with high current

small relative to current the income

The notion of Ricardian

an inflation

future tax increases.

based on the individuals

domestic

its sign is unexpectedly

will have to switch to a fiscal tax as the rate of inflation

Forward

wealth effect associated

although

that the monetary

to collect

the government

and

domestic

ratio with negative sign, and

the lagged savings ratio. The savings rate is sensitive to the current rate in seven of the thirteen

or over 0.70.

sluggish adjustment

and Obstfeld

capital

flight.

exchange

transactions,

real exchange

rates,

Simple

and

tests for capital

being close to zero and low variability [1984]).

Real interest

differentials

are

CREDIT RATIONING AND MACROECONOMIC ADJUSTMENT

175

333

-

nSxlco Feiiir’ “‘, 1..

,............._...,..........................................................

150

1......‘-.......y.../P--J\ . .. ......... ............;$;

125

:x ___

/

.

loo

50

,965

1967

1964

1971

1975

1975

1977

1979

1981

19th

1985

1987

Figure 1. Indices of Real Exchange Rates for Countries where Savings is Insensitive to Real Interest Rates

difficult to compute

in this article due to the inclusion

nominal

rates and the use of the U.S. inflation

borrowing

1 shows real exchange Republic,

Mexico,

rate indices

and Peru)

rate. These real exchange

for those

of the risk premium

in domestic

rate for every country

countries

(Costa

whose savings was insensitive

Rica,

Figure

Dominican

to the risky real interest

rates are far from being stable around

100 and thus suggest

capital market imperfections. Generally

the fits of the investment

could be expected reliability6 gressive

and savings equations

given the short time series for each variable

A test for heteroskedasticity

conditional

was performed

heteroskedasticity

and savings equations.

procedure

The null hypothesis

were only as good as and their rather

using Engle’s

(ARCH)

(1982)

low

autore-

on both the investment

of no heteroskedasticity

was not rejected

in any of the 26 cases (using an MA( 1) process).

ESTIMATING THE DEGREE OF CREDlT RATIONING It is possible

to construct

by calculating

and the predicted

national

new net transfers-GDP investmentGDP expected statistical

the predicted

savings-GDP

ratio,‘obtained

borrower

in the Figures

Z-14.

borrowing

country

ratio

the actual

received

If the result was positive, the actual

The

new net

ratio were subtracted

proxy lagged one year to allow for loan negotiation.g

all it

indicating

may have been credit rationed. In the figures

ratio and the foreign direct investment-GDP

the debt demand

investmentGDP

from World Debt Tables, and the foreign direct

in the form of new loans8

appear

for new debt for each country

domestic

ratio. The next step was to subtract

if a particular

for credit, the sovereign

results

transfers-GDP

between

ratio to determine

to receive

excess demand

a proxy for the ex ante demand

the difference

from

334

QUARTERLY REVIEW OF ECONOMICS AND FINANCE 15

10

5

0

-5

-10 196)

Figure 2.

1964

i97i

1973

i975

i97f

1974

i9ei

1983

1984

i9d

Expected Investment-Savings Gap Unfunded by Net Transfers and Direct

Investment: Argentina 15

10

5

0

-5

-10

-15

I

1965 i964

I i97i

1975

i979

197+

1974

igel

is84

i9sk

198'1

Figure 3. Expected InvestmentSavings Gap Unfunded by Net Transfers and Direct Investment: Brazil 20.0

15.0

10.0

5.0

.O

-5.0

-10.0

1

I 1 , 1967

1964

I 1971

1975

i975

i975

1974

194

i903

isa4

Igel,

Figure 4. Expected InvestmentSavings Gap Unfunded by Net Transfers and Direct Investment: Costa Rica

CREDIT RATIONING AND MACROECONOMIC ADJUSTMENT

335

25

20

........................................................,‘.....“.“.....“..“‘....

*,...,.___._..,...

15 10

5 0

-5 -10

-15

I

, 1965

1964

1971

1973

197f

197f

1974

i9ai

19a!l ise4

i9eS

Figure 5. Expected Investment-Savings Gap Unfunded by Net Transfers and Direct Investment: Dominican Republic

-15

1962

i966

1971

' 3 197

1974

i97f

i97b

i9ai

i9aS

' k 198

19e+

Figure 6. Expected InvestmentSavings Gap Unfunded by Net Transfers and Direct Investment: Ecuador

-10 196s

1966

1971

1973

1971

i97f

197)

f9ai

i9a!j 1984

iga+

Figure 7. Expected Investment-Savings Gap Unfunded by Net Transfers and Direct Investment: Guatemala

336

QUARTERLY REVIEW OF ECONOMICS AND FINANCE 20

1965

196b

1971

$975

1974

i97f

1974

1981

1984

is04

i9d

Figure 8. Expected Investment-Savings Gap Unfunded by Net Transfers and Direct Investment: Honduras 12.5

-10.0

1966

1968

1970

1971

1974

1976

197b

i98b

1965

1984

198 ' 8

is80

Figure 9. Expected InvestmentSavingsGap Unfunded by Net Transfers and Direct

Investment:Mexico 25

20 15 10

,~~~

5 0 -5 -10

:::::

. .: :w

.;A.. . ............ .......... ..... \ .............................................

.............

v

-15 1967

1970

1973

1976

1979

1982

1985

1988

Figure10. Expected InvestmentSavingsGap Unfunded by Net Transfersand Direct Investment:Panama

CREDIT RATIONING AND MACROECONOMIC ADJUSIMENT

1.j

,‘.., , ‘.

_.._..._.._._.._..._...............................................,.............,..

‘...

,

-*“.

.__,, /

..._

,...._

. . . . . . . . . . .

. . . . . . .

-10

.

. . . . . . . .

.... . . . .. ..

.I

~~~

. . .

.

.-..../

‘..,

..

.

’

. .., ,/’ . . . . . . . . . ._.... .. .

I

,,,......

x.,

’

:

I

/’

‘.1:;:-”

/

,

337

.

.

. . . .

. .

. . . . .

. .

. . . .

. . .

.

. . . . .

. . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . .

.

.

.

.

.

.

. . . . . . . . . . . . . . . . . . . . . . .

I

' i96f

1964

i971

i973

1975

i97f

1974

is81

1984

1905

i9d

Figure 11. Expected Investment-Savings Gap Unfunded by Net Transfers and Direct Investment: Paraguay

-25

I

1 i96+

1964

1971

1971

i971

i97f

1974

is81

1983

isaf

isd

Fz&ure22. Expected InvestmentSavings Gap Unfunded by Net Transfers and Direct Investment: Peru

-10 i96f

1964

1971

i973

i975

i97f

i974

isei

ise!i i9d

i9af

Figure 13. Expected InvestmentSavings Gap Unfunded by Net Transfers and Direct Investment: Uruguay

QUARTERLY

338

-25

'

REVIEW OF ECONOMICS

I 196f

1964

' 5 197

1971

1975

197+

AND FINANCE

i974

1981

isa5

i9sf

isd

Figure 14. Expected InvestmentSavings Gap Unfunded by Net Transfers and Direct Investment: Venezuela

Generally sample

the results suggested

period

straddles

(1965-1988).

The 95 percent

the zero rationing

(1982-198’7))

Costa

whole sample

period).

significant.

that credit rationing

Rica

confidence

line on the average

(1981-1988))

was not prevalent interval”

for each country

in all cases except

and Mexico

(sporadically

The timing of these apparent

episodes

In the case of Costa Rica credit rationing

during the

for Argentina throughout

of credit

was a regular

phenomenon

to 1984. Costa Rica was always behind

on its debt service over the sample period,

so relatively

in the region

than any other

debt outstanding

country

and disbursed

to exports

and grew at an average of 11.6 percent 150.3 percent

except

for Bolivia.”

ratio (DOD/EX)

averaged

while the average DOD/EX

with average growth of 8.9 percent.l*

Rica

compared

rescheduled

a large

portion

at terms

to the average for the region.13 However debt servicing

ued until President and initiated disappearance Argentina threatening

Oscar Arias invoked a partial suspension

impressive

economic

of credit rationing

Costa Rica’s

of debt difficulty

and Mexico to suspend

also rescheduled debt

large

which

service.

difficulties

rationing

may precede

countries

in the sample also rescheduled

results

contin-

of debt service payments with the

here.

a large portion

The

In 1982

deteriorated

reforms. l4 These events roughly coincide in 1983 as indicated

up more

for the region was

Other indicators

of its debt

is

157.4 percent

are also above the averages for the region with above average deterioration. Costa

the

rationing

of their debts in 1982 after

suggest

scale debt reschedulings

that episodes

although

of credit

most of the other

their debts in 1982.

SUMMARY AND CONCLUSIONS The purpose rationing

of this article was to determine

was a common

phenomenon

if permanent

in international

unanticipated sovereign

Trpe II credit

debt markets

over

CRJDIT RATIONING AND MACROECONOMIC

the period 1965-1988,

a period characterized

sequent repayments crises. Unanticipated lasting and infrequent phenomenon extent, Argentina unanticipated

ADJUSTMENT

by rapid debt accumulation

339

and sub

credit rationing was seen to be a short

for all countries except Costa Rica, and to a lesser

and Mexico. In the cases of Argentina,

Costa Rica and Mexico,

credit rationing preceded debt crises. The magnitude of credit ration-

ing, as a percentage

of GDP, was usually quite large when detected (5-10 percent of

GDP for Argentina,

Costa Rica, and Mexico).

Despite the significant external and

internal shocks to the countries in the region since the late 1970’s (rising real interest rates, falling terms of trade, and recession in the developed countries),

the results

suggest that most of the countries in the region are quickly able to conduct appropriate macroeconomic

adjustment

policies in response to unanticipated

shocks creating

temporary investment-savings gaps. Despite the infrequency of unanticipated credit rationing over the sample period, the phenomenon

of nations adjusting to anticipated credit rationing using appropri-

ate domestic policies may still be prevalent. Kohler (1986)

and Bulow and Rogoff

(1989) emphasize that if credit rationing is perceived as a credible threat by borrowers, borrowers will be persuaded to avoid the use of suspensions on debt service payments or outright default, without actual credit rationing ever taking place. The evidence in this article suggests that this is largely the case. A logical extension to this article would be to develop a method

to detect anticipated

credit rationing

and estimate its

frequency.

APPENDIX Variables and Sources

WV =

Gross Investment--GDP

ratio obtained International

Financial Statis-

tics, various issues. G=

Percentage

change in real GDP (1980=100)

calculated from Interna-

tional Financial Statistics, various issues.

i=

Nominal average annual lending rate for sovereign loans obtained from World Debt Tables, various issues.

TJS =

U.S. inflation rate calculated as the percentage deflator obtained from International

K=

Domestic percentage from International

change in the GDP

Financial Statistics, various issues.

change in the Consumer Price Index obtained

Financial Statistics and United Nations Statistical

Yearbook for Latin America and the Caribbean, various issues. REX=

Real exchange rate (1980 = 100) calculated by the formula e(PUS/P) where e = nominal exchange rate, PUS = U.S. Producer Price Index,

340

QUARTERLY REVIEW OF ECONOMICS AND FINANCE P =

domestic

Consumer

Financial

Statistics

America TI

=

and the Caribbean,

Terms of trade Yearbook

(D/Y) =

Price Index. Statistics obtained and United

Nations

Debt - GDP ratio calculated

from International Yearbook

for Latin

Nations

Statistical

various issues.

(1980 = 100) obtained

for Latin America

Statistical from United

and the Caribbean,

various issues.

from World Debt Tables, various issues. In

this case debt is total sovereign

and private debt, both disbursed

and

undisbursed. S =

Gross national

savings - GDP ratio obtained

from World Tables, various

issues. TN=

Changes

in real income

[A(Px/Pm)/(Px/Pm),ll

due to terms of trade changes

calculated

by

(xt-l/yd.

NOTES *Formerly titled “A New Test for Credit Rationing in Sovereign LDC Debt Markets.” Thanks to two anonymous referees for helpful comments. 1.

See Eaton, Gersovitz, and Stiglitz (1985) and also Eaton and Taylor (1986). For an

earlier survey of empirical research see Saini and Bates (1984).

2. Dornbusch

(1985)

discusses methods to narrow the investment-savings gap using

exchange rate devaluations. 3. The test will not detect Type I rationing for two reasons: the self-screening bad risk borrower argument already detailed in the text; LDC borrowers typically pay LIBOR plus a country-specific risk premium meaning that most borrowers do not face the same interest rate, which is required for Type I rationing. 4.

Also the disequilibrium method requires a large number of observations from both

subperiods 5.

where price is rising and falling to generate reliable estimates.

The adjustment speed of investment is one minus the regression coefficient for the

lagged investment-GDP ratio. 6.

Blejer

and Khan (1984)

note the difficulty in estimating neoclassical

investment

functions for developing countries due to lack of available data on capital stocks and their rates of return. 7.

This includes net transfers from both sovereign, official, and private lenders.

8.

Thus desired new investment can be financed through domestic savings, borrowed

foreign savings, and foreign direct investment. Any excess desired new investment cannot be financed and investment will be rationed. 9. At the suggestion of one of the anonymous referees, the actual new net transfers-GDP ratio was subtracted from the debt demand proxy without lagging one year. The results were not quantitatively different. The debt demand proxy was lagged one year since obtaining a sovereign loan requires considerable time and effort. Typically a lead bank is instructed to form a banking group by soliciting smaller banks. In this way,default risk is spread among all members of the banking group. Terms and conditions must then be negotiated (interest spread above LIBOR, maturity date, balloon payments, primary and secondary loans, commissions, etc.).

CREDIT RATIONING AND h#ACROECONOMIC ADJUS’IMENT

341

Finally all conditions must be in accordance with credit regulations spelled out by the Federal Reserve, the IMF, and the World Bank. 10. Confidence intervals were computed asf t.o25,2N-Kl-K2 sfwhere STand sl are forecast variances computed using standard formulae. 11.

See Bianchi, Devlin, and Ramos (1985).

12.

Source: World Debt Tables, various issues.

13.

See Bianchi, Devlin, and Ramos (1985), p. 64.

14.

See Sachs (1989) for a further discussion.

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[61

171 181 ml

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Kohler, Daniel E 1986. “To Pay or Not to Pay: A Model of International Defaults.“Journal of Policy Analysis and Management 5(4): 742-759. MacKinnon, K. 1989. “Inflation, Interest Rates, and the Capital Stock in a Cash-inAdvance Economy.” Working Paper Series No. 8402, York University. Morgan, John B. 1984. “A Reestimation of Eaton and Gersovitz’s Model of Borrowing with Default Risk.” Place, TX: Texas Commerce Bank. Sachs, Jeffrey D. 1989. NezoA#m~aches to the Latin American Debt Crisis. Essays in International Finance No. 174, Princeton, NJ. Saini, Krishan and Phillip Bates. 1984. “A Survey of the Quantitative Approaches to Country Risk Analysis.” Journal of Banking and Finance 8: 341-356. Stiglitz, Joseph E. and Andrew Weiss. 1980. “Credit Rationing in Markets with Imperfect Information.” Atican Economic Be&w 71: 393-410. Stockman, A. 1981. “Anticipated Inflation and the Capital Stock in a Cash-in-Advance Economy.” Journal of Monetary Economics 8: 387-393.

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