Improving the currency composition of external debt: applications in Indonesia and Turkey

Ken Kroner and Stijn Claessens ()

No 150, Policy Research Working Paper Series from The World Bank

Abstract: Changes in exchange rates affect both the level and the structure of a country's external debt. Indonesia's debt service increased from 10 percent in 1980 to 37 percent in 1986, largely because of the depreciation of the U.S. dollar and the fall in oil prices. Developed countries can hedge against exchange rate and commodity price changes by purchasing currency futures or other hedging instruments, but most developing countries do not have access to futures markets. They can, however, reduce their exposure by matching the currency composition of their external debt with the currency composition of the cash flows with which they service their debt. Using advanced econometric techniques, the authors analyze what the currency exposures might have been in Indonesia and Turkey, and suggest borrowing portfolios that might be effective in hedging these countries'terms of trade against exchange rate fluctuations. The results are promising for Indonesia, where the optimal currency portfolios might have resulted in a significant reduction in risk. The results are less satisfying for Turkey, although they do indicate possible research directions.

Keywords: Economic Theory&Research; Fiscal&Monetary Policy; Environmental Economics&Policies; TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT; Macroeconomic Management (search for similar items in EconPapers)
Date: 1989-01-31
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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