_Low-Income Countries’ Access to Private Debt Markets_ countries are expected to increase their exposure to frontier markets over coming years, especially in countries that show promise of sustainable rapid growth and profitable investment opportunities.

Assessing the prospects for individual countries is a daunting task. The above analysis indicates that access to private debt markets does not hinge on thresholds levels of debt burdens, credit ratings, bond spreads, economic size (GNI) or income level (GNI per capita), but rather reflects a complex set of decisions taken by debtors and creditors, each weighing the potential costs and benefits.

From the debtor’s perspective, the potential benefits of external financing include expanding the availability of credit to governments and corporations, particularly in situations where they are unable to meet their financing needs in the domestic market. Access to global capital markets can also reduce intermediation costs by taking advantage of economies of scale attained in large syndicated bank loan transactions and bond issues. Assessing private capital flows can also give countries stronger incentives (“collateral benefits”) to pursue economic policies that are more conducive to promote long-run growth (Kose and others 2006). Several recent studies stress the importance of improving the quality of domestic financial institutions in order to capitalize on the development impact of cross-border debt flows.<sup>20</sup> Empirical estimates of such benefits are inconclusive, however. Gourinchas and Jeanne (2006) and Prasad, Rajan, and Subramanian (2007) conclude that it is difficult to establish a robust causal relationship between private capital inflows and economic growth using macroeconomic data.

Managing the risks associated with external borrowing presents a major challenge to governments and corporations, particularly in countries vulnerable to sudden shifts in investor sentiment. Debt sustainability has surfaced as a major issue among donors, and the development community at large, as more low-income countries explore the option of borrowing from abroad on non-concessional terms. There has been growing concern that some countries (especially those that received major debt relief) might take on excessive risks by expanding borrowing on non-concessional terms, and thereby jeopardize debt sustainability over the long term. External debt burdens have declined considerably in most lowincome countries, particularly those that have received debt relief from the Heavily Indebted Poor Country (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI), as well as additional debt relief from Paris Club creditors (figure 20). The external debt of low-income countries declined from 65 percent of GNI in 2000 to 29 percent in 2007, while that for middle-income countries declined more modestly (from 36 to 25 percent). In 2007 external debt declined below 30 percent of GNI in 16 of the 23 countries that have reached the completion point of the Heavily Indebted Poor Countries (HIPC) initiative. Nigeria’s external debt fell from 78 percent of GNI in 2000 to 6 percent in 2007 following a major debt relief agreement with its Paris Club creditors in 2005.

> 20 See IMF (2007) and Bordo (2008) and the references therein.

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