YEN APPRECIATION AND ASIAN DEBT

10:06 AM Oct 29, 1996

YEN APPRECIATION AND ASIAN DEBT
by Prof. Leonor M. Briones*

Geneva 28 Oct (TWN) -- The Japanese yen started to appreciate in value against the US dollar in the second half of the 1980s, and this trend become more dramatic in the 1990s, with the 1994 yen value (at Y103.33=$1) twice that of the 1980 value (Y217.2=$1).

[Currently it is about 116 yen to one dollar]

The importance of this yen appreciation on the debt of situation of developing countries is better understood when seen within the context of Japan's growing importance as a creditor country. In 1994, Japan accounted for $121 billion or 25.7% of all bilateral claims on developing countries, more than twice that of the second biggest creditor -- Germany with $53.9 billion claims or 11.4%.

A large part of the Japanese exposure is in Asia. Of the total Japanese bilateral credit, around 60% is lent to East and South Asian countries. The increasing indebtedness is reflected in the rise in yen-denominated long-term debt of many Asian countries.

On the regional level, the yen component of the long-term debt of East Asia and the Pacific increased from 17.9% in 1980 to 36.6% in 1986, and remained thereafter at about 30%. In the case of South Asia it has increased from 8.8% in 1980 to more than 16% in 1994.

The situation is magnified when we look at Asian countries whose yen component of long-term debt exceeds the regional averages.

At least six East and South Asian developing countries have more than 25% of their long-term debt in yen denominations: Bangladesh 25.6%, Indonesia 37.7%, Malaysia 39.4%, the Philippines 38.1%, Sri Lanka 29.6% and Thailand 53.0%.

The Yen's movement against the US dollar cannot but have an effect on the debt situation in these countries.

Many of the countries heavily indebted to Japan turn a blind eye to the yen appreciation's real effects on their indebtedness. Two factors account for this.

First, the importance of Japan in crucial areas of their economies compels these countries to approach the issue with caution. After all, Japan provides a steady stream of official development assistance, is a major source of foreign direct investment (FDI), and is increasingly becoming a major trade partner of these countries.

Indonesia, for instance, brushed aside the impact of the yen appreciation on its debt situation, confident that the negative impact on their debt could be offset by the relocation of Japanese investment to foreign countries, including Indonesia.

Second, the Asian countries heavily indebted to Japan have exerted great efforts to package themselves internationally as having resolved their debt problems. The countries whose yen component of long-term debt exceeds 25% are classified by the World Bank as either moderately or less indebted; they would not want to jeopardise their improved classification with the acknowledgement of the negative impact of yen appreciation.

To be sure, countries heavily indebted to Japan are differentially affected by the yen appreciation. The extent of impact depends on the importance of Japan as an export market for the indebted country, and the indebted country's importance as a destination of Japanese investment. Indebted countries with large export transactions with Japan, and whose FDI from Japan increased as a result of the yen appreciation, less burdened by the yen appreciation.

Still, we can outline the implications of the yen appreciation on developing country debt, the differentiated degrees of impact notwithstanding.

Fiscal effect: The immediate impact of the yen appreciation on countries heavily indebted to Japan is on their national budget. Yen-denominated long-term debt is mainly official debt and is paid for by the national government. When the yen appreciates, the local currency equivalent of principal and interest payments falling due increases.

The budget impact is made even worse when the yen appreciation is not anticipated in the budget assumptions. When the yen value appreciates beyond what is assumed in the programmed budget the increased debt service either increases the budget deficit or crowds out what was already programmed for social and economic services. This is especially true in countries like the Philippines where debt service is automatically appropriated.

Balance-of-payment (BOP) effect: The balance of payments (BOP) of countries which do not have considerable export transactions with, but are heavily indebted to, Japan are negatively affected by the yen appreciation. The yen appreciation means more US dollars will flow out of the country in both current (interest) and capital (principal) payments.

Bangladesh, Sri Lanka and the Philippines are examples of Asian countries where yen-denominated debt exceeds 25% of total long term debt even as Japan remains a secondary export market.

Japan accounts for only 3.16% of Bangladesh's its total exports of $1687.5 million, for 9.56% of total exports of $2176 million of Sri Lanka's total exports, and 20.04% of total exports of $8839.6 million of the Philippine's total exports. The BOP effect of the yen appreciation on these countries is higher as might be expected.

Effect on debt stock: The dollar value of total debt stock for countries heavily indebted to Japan increases when the yen appreciates. While this is seen merely as a relative valuation of total debt, the effect becomes real as payments fall due.

Effect on project viability: In projects financed by Japanese loans the additional costs, beyond project assumptions, that result from the yen appreciation put in question the economic viability of individual projects. The appreciation can result in serious and long-term project losses.

It will perhaps take a serious foreign payments problem before countries heavily indebted to Japan officially acknowledge the costs of the yen appreciation to their countries. However, we cannot simply ignore the impact of the yen appreciation on national budgets as well as on the economic viability of projects financed by Japanese loans. These have serious implications for priority, equity and development questions among debtor countries.

A more detailed review of the impact of the yen appreciation on specific countries is in order. When this is done, we can think about mechanisms through Japan can share part of the costs to the debtor country of the yen appreciation. With due consideration to individual country capacities, the costs can be deferred by converting part of the debt to Japanese grants or through a write-off of some debt.

Efforts along these lines have already been started by the Freedom from Debt Coalition (FDC) in the Philippines. In partnership with Japan-based NGOs Pacific Asia Resource Centre, People-to-People Aid and the Japan Bretton Woods Coalition, in November 1994 the FDC initiated meetings between two members of the Japanese Diet and Philippine officials in the department of finance, the Philippines Central Bank and the Philippine Senate. The Japanese legislators were specifically looking at the possibility of reducing the Philippine debt owed to Japan by an amount equivalent to the increase in the debt stock due to the appreciation of the yen.

Such efforts must be given a fresh push at the regional level, with the objective of producing concrete results in the near future.

(*Prof. Briones is President of the Freedom from Debt Coalition in the Philippines. The above is abstracted from his article in the World Credit Tables, 1996, published by EURODAD, the European NGO coalition on debt issues, based in Brussels)