After a challenging 2020, prospects for the global economy have improved this year as pandemic headwinds begin to fade and financial conditions remain broadly accommodative across mature and emerging market economies. The global economy is expected to rebound by 5.8% in 2021, following a sharp contraction of 3.3% in 2020. However, the economic recovery remains highly uneven, amid significant uncertainty about the path of the pandemic in many parts of the world. These factors continue to weigh on the outlook for capital flows to emerging markets. According to the latest estimates from the Institute of International Finance (IIF), non-resident capital inflows to the 24 major emerging markets (excluding China) monitored by the IIF are expected to reach over $850 billion in 2021 (Chart 1), largely driven by the most recent allocation of Special Drawing Rights (SDR) by the International Monetary Fund (IMF). Excluding the SDR allocation, total private flows are expected to rise from $608 billion in 2020 to $700 billion in 2021—well below the pre-pandemic peak of over $800 billion in 2019. This modest recovery in private capital flows is expected to be driven by portfolio debt and cross-border banking flows, reflecting the rise of sectoral indebtedness across many emerging markets and developing economies (EMDEs).
Since their endorsement by the G20 in 2004, the Principles for Stable Capital Flows and Fair Debt Restructuring have proven to be an effective framework for sovereign debt crisis prevention and crisis resolution that is widely referenced by debtors, official and private creditors, international financial institutions, and other stakeholders. The Principles emphasize sound policies and transparency on the part of debtors, voluntary, cooperative debtor-creditor dialogue and good faith debt restructuring negotiations. However, recognition of the changes in sovereign debt markets over the past decade, lessons learned from recent debt restructurings, the emergence of the DSSI and Common Framework, and the surge in investor interest in environmental, social and governance (ESG) considerations all underscore the need to update the Principles.
Against this backdrop, the Principles Consultative Group (PCG) launched a working group in May 2021 to assess the recent experience with sovereign debt crisis prevention, management, and resolution practices, to draw appropriate lessons, and to make recommendations on how best to strengthen the existing Principles to ensure stable capital flows and fair debt restructuring. The PCG anticipates publishing the updated Principles ahead of the IMF/World Bank Spring Meetings in 2022. These recommendations focus on a number of topics including:
- Promoting best practices in the formation of creditor committees, or a steering group in the event of multiple committees;
- Addressing concerns about comparability of treatment, IMF lending into arrears, broader IMF expectations about debtor good-faith engagement with creditors, and the role of Debt Sustainability Analyses in the context of a restructuring;
- Refining the use of the International Capital Market Association’s (ICMA) collective action clauses (CAC) framework;
- Assessing recent proposals for reforms to sovereign loan agreements;
- Strengthening debt transparency on the part of all creditors and borrowers; and promoting meaningful and regular public-private sector dialogue and consultation;
- Addressing scenarios that arise from exogenous events such as climate change and pandemics, including through the use of state-contingent debt instruments;
- Integrating ESG and natural capital considerations in restructuring negotiations and using new instruments for sustainable financing, e.g. sustainability-linked bonds;
- Factoring in ratings considerations and any relevant impact these may have on sovereign debt markets.