Academic literature on the topic 'Long-term debts'

The study aims to identify the impact that debt structure has on the financial performance of the organizations listed on the Palestinian Exchange (PEX). The sample of the study consists of 41 companies listed in the PEX, excluding the banking sector. The descriptive method is used, in addition to model measurement, to analyze the panel data using the multiple-regression method. The study concludes that the ROA increases when long-term debts are used for financing the assets in the insurance, investment, and industrial sectors. On the other hand, in the service sector, the ROA is negatively affected by the use of long-term debt, and only the industrial companies’ ROA is significantly affected by the total debt. Furthermore, the study finds that the ROA of companies in the insurance and investment sectors is positively impacted by short-term debts. The main recommendation is that companies in the insurance, industrial, and investment sectors should depend on properly balanced long-term debts to increase their revenue.

Objective – The study examined the moderating effect of board financial literacy on the relationship between capital structure and firm financial performance of listed non-financial companies in Nigeria. Design/methodology – Capital structure was measured by long term debts to total assets, short term debts to total assets equity to total debt ratio and board financial literacy was measured by ratio of board members that have professional and academic qualification in accounting, finance and economics. Meanwhile financial performance was measured by return on assets. Secondary data was extracted from the sampled firms annual report and accounts and analyzed using Panel Least Square. Results – The study revealed a positive and significant relationship between long term debt and ROA. It also shows that board financial literacy moderate capital structure significantly and increase firm performance. The study recommended that the management of Nigerian listed non-financial firms should optimize the capital structure in order to increase the financial performance. They can do that through ensuring that their capital structure is optimal by using more of current debts and non-current debt than equity. The Board of Directors of Nigerian listed company should be concerned about the level of long term debt, short term debt and include members that are financially literate who will contribute in financing decision of firm in order make optimal capital structure for better financial performance. This is because the findings of this study revealed a positive significant moderating relationship between long term debt, short term debt and financial performance.

The purpose of this paper is to investigate the relationship between corporate governance practices and capital structure of public-listed companies in Malaysia. Using the annual reports of 273 Malaysian public-listed firms on the Bursa Malaysia between 2008 and 2012, hierarchical multiple regression analysis was conducted. Corporate governance was measured by variables including board size, CEO duality, ownership structure, and board meeting. Capital structure was measured through four variables: debt-to-equity ratio, long-term debts, short-term debts, and debt ratio. The findings indicated that corporate governance practices have a positive influence on the debt-equity ratio, long-term debt, short-term debt and a debt ratio of capital structure. However, corporate governance practices’ influence on the debt ratio is found statistically insignificant. The findings also indicate that firm size moderates the relationship between corporate governance variables and capital structure. Empirically, these findings are useful for measuring and understanding financing decisions taken by the Malaysian public listed firms. It also offers insights to policymakers interested in enhancing the role of corporate governance in formulating management strategies.

The primary objective of shareholders and financial managers is generally stated to be the maximization of shareholders’ wealth by increasing the firm value. This research was undertaken to investigate the effect of corporate financing decisions on firm value       . The research has been carried out using the panel data procedure for a sample of 256 firms from 9 sectors listed on Bursa Malaysia during the period 2000-2015. The study uses Tobin’s Q representing firm value for the dependent variable. The corporate financing was measured by leverage (short-term debt to total assets, long-term debt to total assets, total debt to total assets and total debt to total equity) and debt maturity (long-term debt to total debt). Short-term debt to total assets and long-term debt to total assets has a positive significant relationship to firm value. This finding is consistent with the view that leverage and dividends mitigate agency costs of free cash flow problems, therefore, increasing firm value. Total debt to total assets affects firm value negatively. This proves that although there are benefits of debts, there is also the cost of debts. The cost of debt financing arises from the increase in the probability of bankruptcy. Firm value does not depend on the length of debt maturity.

The paper aims to investigate the effects of capital structure on banks’ performance on Ugandan banks for a ten years period, 2006–2015 with a sample of 20 commercial banks. The study employs four performance indicators of return on equity, return on assets, net interest margin and cost to income ratio to determine bank performance. Panel regression models are used to determine the effects of capital structure on bank performance. Independent variables are sub‑divided into capital structure variables namely; long‑term debt to total assets, short‑term debt to total assets and total debt ratio and then control variables are bank size and tangibility of assets. Results portray that there is a positive relationship between capital structure variables and bank performance. It’s between long‑term debts, total debt with net interest margin. There is also a positive relationship between total debt and return on assets. It is still the same between total debt and returns on equity. However, there is a negative relationship between short‑term debt and return on assets. The results also signify a positive relationship between bank size and net interest margin. It is still the same between bank size and returns on equity plus return on assets. There is a negative relationship between the tangibility of assets and net interest margin. It is also the same with return on equity. The findings propose that profitable banks rely more on debt financing as their financing option. This is advanced by the fact that approximately 68 % of total assets are represented by short‑term debts for Uganda’s commercial banks. This further implies that Ugandan banks largely depend on short‑term debt financing for their business operations compared to long‑term debt. Hence the study recommends that executive banking management teams plus policymakers should design prudent financing decisions aimed at reducing overreliance on debts to yield optimal capital structure levels. This will enable banks to remain at the top of the profitability game competitively in the banking industry.

This research investigates the effect of the components of state government debts (domestic and external debts) on the various forms of investment (domestic investment and foreign direct investment — FDI) in Sri Lanka both in the short and long terms applying the ARDL bounds testing approach over the period, 1980–2020. The previous research has revealed that higher internal and external government borrowing lowers domestic investments in both the short and long terms, confirming the crowding-out effect of public debt on the volume of domestic investment of our country. The research discovered that internal debt accumulates FDI inflows in the short term, but it crowds out FDI when considering the long term. In contrast, foreign debt has a substantial inverse connection with FDI inflows in the short term, as expected, but it does not influence FDI in the long run. The findings also showed that higher lending rates of interest share a considerably inverted connection with domestic investments, but it does not have any impact on the long-term FDIs. However, in the short term, an increase in the rate of lending interest rate decreases the prospect of external financiers and crowds out the course of FDI in Sri Lanka. Further, the depreciation of the exchange rate decreases both domestic investment and the flow of FDI in the short-run, but it encourages both types of investments in the long run

Lately, the credit rating agencies have been the subject of significant criticism for failing to warn the investors of the defaults well in advance. Investors in long-term debt instruments are usually risk averse, buy-and-hold types; and hence, for them, the variability of investment-grade default rates is particularly important since they employ simple investment-grade rating cut-offs in the design of their investment eligibility plan. According to ICRA (Investment Information and Credit Rating Agency of India) and the other credit rating agencies, default means that the company has either already failed in the payment of interest and/or principal as per terms or is expected to fail. The debt rating at no time informs as to how much bond face value holders would recover in the event of a default. The present regulations pertaining to the credit rating agencies preclude the investors and issuers from suing agencies for awarding a particular rating. Hence, credit ratings are of value only as long as they are credible. This paper tests the reliability of ratings assigned by ICRA on the basis of the actual default rate experience on long-term debt across five sectors over a period of seven years, i.e., 1995–2002. The reason for including only long-term debt instruments for the purpose of analysis is that the assigned rating and its movement can be observed only over a long period. Since the credit rating agencies do not publish ratings that are not accepted by the issuers, this study is limited to only those issues that have been accepted and used by the issuers. The default statistics were examined sector-wise, period-wise, and company/institution-wise. Analyses of the background and business, operating performance, management and systems, financial performance, prospects, key issues, and the reasons cited for defaults were undertaken with respect to all the companies. Simple metrics like default rates by rating grades and rating prior to default were used to analyse whether low ratings (i.e., speculative-grade ratings) were assigned by ICRA to defaulting credits well in advance of default rate. Further, an attempt was made to identify whether companies in default had issued other debt instruments that were rated by other credit rating agencies. The findings highlight the following: The performance of the manufacturing sector vis-a-vis other sectors has been dismal. The period of high defaults (1997-1999) coincides with a high interest regime and poor economic conditions in India. ICRA's performance in terms of proper surveillance and provision of timely and complete information about the companies rated by them has not been up to the mark. The findings certainly draw attention towards the fact that excessive reliance on credit rating needs to be reduced. Since the governance of the credit rating agencies is questionable, adequate steps have to be taken to make them more accountable.

Many economic researchers and economic policy-makers are discussing an upcoming global financial crisis that will result in a long-term economic recession due to the accumulation of global debt that has reached record levels. However, the truth is that the crisis is still far from our economic reality because the debt crisis has been addressed in a number of countries since the crisis of the 1980s by the rescheduling and write-offs of debts, international cooperation, and other measures. Also, the United States is still able to manage its debts as long as the dollar is the global reserve currency, and it cannot easily be abandoned as such. In addition, the International Monetary Fund is prepared to manage debts and financial crises while at the same time monitoring economic indicators. It provides the necessary international liquidity to achieve global monetary and economic stability.

Economic growth is a fundamental indicator in assessing economic performance. In assessing the economic growth, it can use several important variables such as Inflation, Government Consumption Expenditure, Foreign Debts, and Sharia Finance. In turn, this research aims to analyze the impacts of these variables on the economic growth in Indonesia (Quarter I – Quarter IV) in the period of 2011-2018. The Error Correction Model used in the analysis method. The results of the analysis showed that the variable inflation in the long-term harmed economic growth; while, in the short-term, the level of inflation had a positive impact on economic growth. Meanwhile, the variable of Government Consumption Expenditure had a negative contribution to economic growth. Furthermore, foreign debt in the long term hurt economic growth, but for the short term, it could bring the positive one. Variable of Sharia finance showed a good result both in the short term and in the long term with a negative correlation with economic growth in Indonesia. However, all variables of inflation, Government Consumption Expenditure, foreign debts, and sharia finance simultaneously had an impact on National Economic Growth.

Previous researchers, especially on large enterprises, have revealed that debt financing structure influences enterprise performance. Though the issue has been extensively researched, micro, small, and medium-sized enterprises (MSMEs) have traditionally been operating differently as compared to large enterprises in terms of their financial decisions, ownership and management style, and behaviour. Therefore, this study will explore the gaps encountered by all MSMEs to grow their businesses. These include forms and type of industry, firm size, asset tangibility, and a firm’s current assets in relation to its current liabilities and profitability level. The study examines the influence of financing structures on performance of micro, small and medium-sized enterprises (MSMEs) in South Africa. The ordinary least squares (OLS) technique of measurement is applied to examine the effects of financing structure on performance across various industrial sectors in the years 2013, 2014 and 2015. The findings in this study indicate an increase in the use of leverage to drive the influence of total debt on performance in all industrial sectors of MSMEs in South Africa. From the cross-sectional regression analysis, the results show that financing structure has a negative effect on the profitability of MSMEs, although not absolutely. The findings show that the size of the enterprise, asset tangibility, and the ratio of current assets to current liabilities are the most influential of borrowing decisions in total debt, short-term debt, and long-term debt. A significantly negative effect is observed for long-term debt, while short-term debt (STDR) exhibits a significantly positive effect. Thus the influence on MSMEs’ leverage on performance is driven by the usage of short-term debt. The variables of size of the firm, and ratio of current assets to current liabilities, do not have the same effect in all debt levels; the significance is substantially higher for long-term debt than for total debt and short-term debt. On the other hand, our empirical results suggested that transactional costs, and an asymmetric information problem in smaller firms, may lead to a mainly negative influence on size and total debt. The asset structure on profitability observed across the years showed mixed experiences. The ratio of current assets to current liabilities was found to be positive and significant on long-term debt and short-term debt leverage.

This thesis studies the optimal conduct of unconventional monetary policy in the form of purchases of long-term government debt by the central bank and, motivated by this policy tool, the evolution of long-term government debt holdings in household portfolios over the course of the life cycle. It is comprised of three self-contained chapters. The first chapter investigates whether it can be beneficial for central banks to use the unconventional tool even when the main policy rate is not constrained by the zero lower bound. A friction in the interaction between households and banks allows central bank purchases of long-term government debt to reduce long-term interest rates and thus to stimulate economic activity. If debt purchases and conventional short-term interest rate policy are coordinated in an appropriate way, the central bank is able to reduce the volatility of output and inflation. In the second chapter, the role that unconventional monetary policy can play in a currency union is analysed. A model is laid out, in which two countries form a currency union with a common central bank but separate and uncoordinated fiscal policy institutions. When monetary policy is implemented only through the common short-term interest rate, the central bank is unable to respond effectively to country-specific shocks. Due to segmentation in the market for long-term government debt, the yield on long-term debt can differ across countries. As a result, a monetary policy authority that can rely on bond purchases is able to address idiosyncratic shocks reflected in volatility of the natural terms of trade more effectively and to achieve higher welfare than one that cannot make use of this instrument. The final chapter studies the long-term government bond share in household portfolios over the course of the life cycle. US data from the Survey of Consumer Finances suggests that participation in the market for long-term government debt first increases and later decreases as agents approach the retirement age. The portfolio share conditional on participation is non-decreasing over the working life. These stylised facts can be explained by means of a portfolio choice model in which agents are subject to aggregate risk through asset returns as well as idiosyncratic risk through labour income and the stochastic events of retirement and death.

Profitability is a characteristic of the ability of a company to generate profits per unit of revenue (income), assets, capital, investments, cash flows, etc. Single isolated values of return on capital (investment) are not able to provide information about the success or failure of the use of capital and investments. This study presents the main metrics of return on capital and investment and the method of their calculation on the Ukrainian companies’ open financial statements.
Рентабельність – характеристика здатності підприємства генерувати прибуток у розрахунку на одиницю виручки (доходу), активів, капіталів, інвестицій, грошових потоків тощо. Поодинокі ізольовані значення рентабельності капіталу і інвестицій не здатні надати інформацію про успішність чи неуспішність використання капіталу і інвестицій. В даному дослідженні наведені основні метрики рентабельності капіталу і інвестицій і методика їх розрахунку по відкритій фінансової звітності українських підприємств.

Capital structure is one of the most frequent topics in the finance literature. This literature has its origins in studies of the manufacturing industry. Much of the results of this work have been applied indiscriminately to other industries without thorough validation. Only limited studies have considered financial structure in hospitality industry. The service industry is different than manufacturing industry, and even the hospitality industry is not homogeneous. The restaurant industry and lodging industry are quite different from each other. Of interest to this present study is to seek to understand how the patterns of capital structure are shaped within the context of the multi-unit casual themed restaurant industry. Restaurant industry is well known for a high bankruptcy rate. Many multi-unit restaurants exist in the casual themed restaurants strategic group in the Unites States, and many small independent restaurants are also present. The firmâ s strategic choice and its relationship with financial structure became a topic for my research. Publicly traded casual themed restaurants have been selected in this study. Hypothetically a common capital structure exists among firms within this strategic group. In this study, an investigation can consider the relationship among financial ratios as well as the uniqueness of the financial structure of the casual themed restaurants.
Master of Science

This paper analyzes what factors influence the long-term interest rate, in order to give an understanding of why the government debt has increased in EU member states. It is a statistical study of panel data analyzed by the fixed effect model. The research of the 27 EU member states is based on secondary data from the European Commission; Eurostat and EconStats. The results by the fixed effect model show that government debt, budget deficit and presidential system are significant and have a positive relationship with the long- term interest rate. The growth rate is significant, having a negative relationship with the long-term interest rate and the financial crisis did not increase the long-term interest rate. The results were not entirely consistent with theories and previous studies.

The Swedish National Debt Office (SNDO) is the Swedish Government’s financial administration. It has several tasks and the main one is to manage the central government’s debt in a way that minimizes the cost with due regard to risk. The debt management problem is to choose currency composition and maturity profile - a problem made difficult because of the many stochastic factors involved.

The SNDO has created a simulation model to quantitatively analyze different aspects of this problem by evaluating a set of static strategies in a great number of simulated futures. This approach has a number of drawbacks, which might be handled by using a financial optimization approach based on Stochastic Programming.

The objective of this master’s thesis is thus to apply financial optimization on the Swedish government’s strategic debt management problem, using the SNDO’s simulation model to generate scenarios, and to evaluate this approach against a set of static strategies in fictitious future macroeconomic developments.

In this report we describe how the SNDO’s simulation model is used along with a clustering algorithm to form future scenarios, which are then used by an optimization model to find an optimal decision regarding the debt management problem.

Results of the evaluations show that our optimization approach is expected to have a lower average annual real cost, but with somewhat higher risk, than a set of static comparison strategies in a simulated future. These evaluation results are based on a risk preference set by ourselves, since the government has not expressed its risk preference quantitatively. We also conclude that financial optimization is applicable on the government debt management problem, although some work remains before the method can be incorporated into the strategic work of the SNDO.

The aim of this thesis is to point out recent development in the field of debt creation, its concordance with academic practice and to outline feasible utilization of financial modeling in the area of government deficits. The effort is to put institutional operation of debt management into context of recent history of financial markets and to verify its success. The process of debt portfolio management with use of advanced financial tools is shown on the sample of Czech debt manager. From the observation of the overall environment we can state the effort to develop efficient domestic debt market and the conception of long-term strategies based on risk management principles and to draw a set of specific recommendations applicable both to local and general conditions.

AbstractA country’s public debt figures vary considerably in any given year, depending on the definitions used. It creates difficulties in constructing and interpreting long-term statistical series. This chapter examines the policy issues behind the definition and accounting of public debt through history. Based on a critical analysis of widely used historical sources, as well as case studies, it discusses how to interpret historical public debt statistics. Analyzing general trends in the historical development of comparability of public debt statistics since the nineteenth century, it identifies three perspectives on debt accounting that have framed the construction of statistics over time: “financial”, “circuitist” and “benchmarking”. Since public debt accounting and policy depend on the way in which public debt is issued and traded and on the identity of creditors, each of these ideal-types roughly corresponds to a debt regime, and more broadly to a historical period of capitalism.

Tax evasion is one of the biggest challenges for tax administrations around the world. Tax non-compliance leads to a large tax debt in state budgets. Part of these tax debts is impossible to recover, since debtors have neither assets or cash. The aim of this research is to evaluate feasible options to ensure tax compliance. Solutions could be considered in two directions. In short-term it should be considered how to reduce already incurred debts. In the long-term, the segmentation of taxpayers and preventive measures for each segment could be used.

In recent years, there has been a dramatic increase in the number of credit card usage among university students. Credit cards can be a convenient payment tool that gives university students a number of advantages and benefits to learn financial responsibility when it can be used in a controlled and responsible manner. On the other hand, using credit cards also have serious financial consequences when mismanagedly used. The excessive credit card debt and overdue payments give burden on university students’ shoulders before starting their full-time jobs. Besides that, when the other debts such as education credits are added, inevitable stress and anxiety make negative impacts on their newly started adult life. Also, lack of experience on using credit cards and personal financial information, tend to put some students at a higher financial risk due to a large and perhaps unmanageable debt burden. Therefore, rising number of students who use credit cards increases the concern for these long-term negative results of the credit card. In this context, we aim to evaluate the basic demographic and socio-economic factors that affect the attitudes of Kırklareli University students towards credit card ownership, credit card usage, and to evaluate the students' ability to manage their financial situation.

Like most developing countries, current account deficit in Kyrgyzstan is one of the ongoing problems. The external dependency on both consumption and production goods and the lack of diversification of export goods, in other words, the formation of export from the unprocessed goods such as gold and some agricultural products further increase the risks in this area. So, in this study, it is aimed to investigate the sustainability of current account deficit in Kyrgyzstan and also its causes for 2000:1-2016:4 time periods. Time series causality, VAR-analysis approach and the Johansen cointegration methods have been used. When the relations between the current account deficits and the important sub-items of this account are examined, it is found out that the current account deficits are mostly affected by net exports and foreign debt interest payments. From a wider perspective, it has been found that the changes in current account deficit are mostly influenced by foreign direct investments. According to the Johansen cointegration test, there is no cointegration between export and import series, which is why Kyrgyzstan's foreign trade deficit is not sustainable. In the short term, the current account deficits, which are being carried out without any very important problems with the help of foreign workers' income, foreign debts and foreign direct investments, may become an important problem in the long run. To prevent this, there is a need for more active and more effective policies in the country to support real sectors that can compete with the rest of the world.

The article investigates the structure and dynamics of public debt of Latvia for the period from 2006–2016 year. The relevance of the study long-term effects of public debt on the economy of Latvia is predetermined by a significant increase in its volume of low GDP growth rates in recent years. This article discusses conceptual approaches and criteria for evaluation of the public debt. An analysis of the main reasons for the growth of public debt of Latvia after joining the EU, considers its specific characteristics and consequences as compared with the more developed EU countries on the basis of these annual reports of Latvia Treasury over the past ten years. Analysis of the structure of the debt of Latvia on maturity shows that an effective public debt management necessarily involves consideration of the long-term effects of the growth of public debt to the public. High level of the external indebtedness in the structure of Latvian public debt is a factor of the growth of “debt overhang” even following Maastricht criterions of public debt. As a result of the research is justification of differentiated approach necessity to the evaluation of public debt with considering of intertemporal effects.

For the better part of the past 15 years composite materials have been used to repair corrosion in high pressure gas and liquid transmission pipelines. This method of repair is widely accepted throughout the pipeline industry because of the extensive evaluation efforts performed by composite repair manufacturers, operators, and research organizations. Pipeline damage comes in different forms, one of which involves dents that include plain dents, dents in girth welds and dents in seam welds. An extensive study has been performed over the past several years involving multiple composite manufacturers who installed their repair systems on the above mentioned dent types. The primary focus of the current study was to evaluate the level of reinforcement provided by composite materials in repairing dented pipelines. The test samples were pressure cycled to failure to determine the level of life extension provided by the composite materials relative to a set of unrepaired test samples. Several of the repaired dents in the study did not fail even after 250,000 pressure cycles were applied at a range of 72% SMYS. The results of this study clearly demonstrate the significant potential that composite repair systems have, when properly designed and installed, to restore the integrity of damaged pipelines to ensure long-term service.

Dents in buried pipelines can occur due to a number of potential causes; the pipe resting on rock, third party machinery strike, rock strikes during backfilling, amongst others. The long-term integrity of a dented pipeline segment is a complex function of a variety of parameters, including pipe geometry, indenter shape, dent depth, indenter support, pressure history at and following indentation. In order to estimate the safe remaining operational life of a dented pipeline, all of these factors must be accounted for in the analysis. The goal of the full scale experimental program described in this paper is to compile a database of full scale dent test results that encompasses many of the dent types seen in the field, including plain dents, dents interacting with girth and long seam welds, and dents interacting with metal loss features, in both the unrestrained and restrained condition. The dents are pressure cycled until a fatigue failure occurs in the dent. Typical data recorded includes indentation load/displacement curves, applied pressures, pipe wall OD strains along the axial and circumferential centerlines, and axial and circumferential dent profiles. The full scale tests are being performed on behalf of PRCI and US DoT. This paper is intended to show the matrix of dents considered to date and present a representative summary of the data recorded. In addition to presenting the full scale test program and resulting data, this paper summarizes ongoing efforts to develop a validated pipeline dent integrity assessment model. The model under development makes use of the aforementioned full scale experimental data, to validate a finite element model of the denting and re-rounding process for a variety of dent scenarios (i.e. depths, restraints, indenter sizes). The paper discusses the efforts under way to develop and validate the finite element model with the goal being to estimate the fatigue life. The paper is an extension of work discussed in a previously presented IPC paper [1].

For the better part of the past 15 years composite materials have been used to repair corrosion in high pressure gas and liquid transmission pipelines. This method of repair is widely accepted throughout the pipeline industry because of the extensive evaluation efforts performed by composite repair manufacturers, operators, and research organizations. Pipeline damage comes in different forms, one of which involves dents that include plain dents, dents in girth welds and seam welds. An extensive study has been performed over the past several years involving multiple composite manufacturers that installed their repair systems on the above mentioned dent types. The test samples were pressure cycled to failure to determine the level of life extension provided by the composite materials over a set of unrepaired test samples. Several of the repaired dents in the study did not fail even after 250,000 pressure cycles had been applied at a range of 72% SMYS. The primary purpose of this paper is to present details on how Stress Intensification Factors were derived using the empirically-generated data. The results of this study clearly demonstrate the significant potential that composite repair systems have, when properly designed and installed, to restore the integrity of damaged pipelines and piping systems to ensure long-term service.

This paper reviews the design and operation of the Chilean fiscal rule in the past 30 years. Using different empirical approaches, we assess its impact on fiscal procyclicality, public debt, and public investment. While there has been substantial progress in building a modern institutional framework for fiscal policy, we find that the rule is incomplete in two dimensions: it lacks an escape clause, and it needs to supplement the budget balance rule with a debt rule. The former is seen in the pervasive inability of the authorities to steer fiscal accounts back to their long-term sustainable path after the rule was breached the rule in 2009. The latter issue is illustrated by the speedy build-up of the public debt as a result of the need to finance fiscal deficits. We do not find, nevertheless, a negative impact of the rule on public investment. We propose reforms to improve on transparency and accountability, as well as to supplement the rule with escape clauses and a debt anchor.

The world economy has been punctuated by uncertainty as a result of the 2008 subprime crisis, the European sovereign debt crisis, Brexit, and the 2016 US presidential elections, to mention but a few of the reasons. This study explores how the UK real exchange rate reacts to economic policy uncertainty (EPU) shocks using monthly data for the period 1998 to 2020. We contribute to the literature by identifying the long-run and short-run impacts of EPU using a cointegrated ARDL model, and by studying a country that has been through periods of both relatively low and high uncertainty. Results confirm that EPU has an important effect in the long run by depreciating the exchange rate. In addition to urging policymakers and regulators to concentrate on the sometimes difficult task of keeping policy uncertainty to a minimum as a way of sustaining exchange rate stability and thus promoting long-term economic growth, further evidence is provided on exchange rate fundamentals.

For most Caribbean countries, the COVID-19 pandemic will translate into the deepest single-year contraction of real GDP on record in 2020. With the exception of Guyana, countries have experienced deep recessions, severe increases in unemployment, and long-lasting damage to many corporate and household balance sheets. The social consequences of the crisis continue to mount, and despite governments best efforts to buffer the shock to families, enterprises, and domestic markets, there remains a dire need for continued and more broad-based stimulus to ensure that economic capital both human and other wise remains intact. This edition of the Caribbean Quarterly Bulletin briefly reflects on notable economic developments in 2020, then shifts to longer-term issues, including a summary of an upcoming IDB publication, Economic Institutions for a Resilient Caribbean, as well as summaries of the book's key diagnostics and recommendations for each country. In some cases, country sections focus on specific areas of institutional reforms. For example, the Suriname section focuses on fiscal institutions, given the public debt distress there.

1.1 Macroeconomic summary Economic recovery has consistently outperformed the technical staff’s expectations following a steep decline in activity in the second quarter of 2020. At the same time, total and core inflation rates have fallen and remain at low levels, suggesting that a significant element of the reactivation of Colombia’s economy has been related to recovery in potential GDP. This would support the technical staff’s diagnosis of weak aggregate demand and ample excess capacity. The most recently available data on 2020 growth suggests a contraction in economic activity of 6.8%, lower than estimates from January’s Monetary Policy Report (-7.2%). High-frequency indicators suggest that economic performance was significantly more dynamic than expected in January, despite mobility restrictions and quarantine measures. This has also come amid declines in total and core inflation, the latter of which was below January projections if controlling for certain relative price changes. This suggests that the unexpected strength of recent growth contains elements of demand, and that excess capacity, while significant, could be lower than previously estimated. Nevertheless, uncertainty over the measurement of excess capacity continues to be unusually high and marked both by variations in the way different economic sectors and spending components have been affected by the pandemic, and by uneven price behavior. The size of excess capacity, and in particular the evolution of the pandemic in forthcoming quarters, constitute substantial risks to the macroeconomic forecast presented in this report. Despite the unexpected strength of the recovery, the technical staff continues to project ample excess capacity that is expected to remain on the forecast horizon, alongside core inflation that will likely remain below the target. Domestic demand remains below 2019 levels amid unusually significant uncertainty over the size of excess capacity in the economy. High national unemployment (14.6% for February 2021) reflects a loose labor market, while observed total and core inflation continue to be below 2%. Inflationary pressures from the exchange rate are expected to continue to be low, with relatively little pass-through on inflation. This would be compatible with a negative output gap. Excess productive capacity and the expectation of core inflation below the 3% target on the forecast horizon provide a basis for an expansive monetary policy posture. The technical staff’s assessment of certain shocks and their expected effects on the economy, as well as the presence of several sources of uncertainty and related assumptions about their potential macroeconomic impacts, remain a feature of this report. The coronavirus pandemic, in particular, continues to affect the public health environment, and the reopening of Colombia’s economy remains incomplete. The technical staff’s assessment is that the COVID-19 shock has affected both aggregate demand and supply, but that the impact on demand has been deeper and more persistent. Given this persistence, the central forecast accounts for a gradual tightening of the output gap in the absence of new waves of contagion, and as vaccination campaigns progress. The central forecast continues to include an expected increase of total and core inflation rates in the second quarter of 2021, alongside the lapse of the temporary price relief measures put in place in 2020. Additional COVID-19 outbreaks (of uncertain duration and intensity) represent a significant risk factor that could affect these projections. Additionally, the forecast continues to include an upward trend in sovereign risk premiums, reflected by higher levels of public debt that in the wake of the pandemic are likely to persist on the forecast horizon, even in the context of a fiscal adjustment. At the same time, the projection accounts for the shortterm effects on private domestic demand from a fiscal adjustment along the lines of the one currently being proposed by the national government. This would be compatible with a gradual recovery of private domestic demand in 2022. The size and characteristics of the fiscal adjustment that is ultimately implemented, as well as the corresponding market response, represent another source of forecast uncertainty. Newly available information offers evidence of the potential for significant changes to the macroeconomic scenario, though without altering the general diagnosis described above. The most recent data on inflation, growth, fiscal policy, and international financial conditions suggests a more dynamic economy than previously expected. However, a third wave of the pandemic has delayed the re-opening of Colombia’s economy and brought with it a deceleration in economic activity. Detailed descriptions of these considerations and subsequent changes to the macroeconomic forecast are presented below. The expected annual decline in GDP (-0.3%) in the first quarter of 2021 appears to have been less pronounced than projected in January (-4.8%). Partial closures in January to address a second wave of COVID-19 appear to have had a less significant negative impact on the economy than previously estimated. This is reflected in figures related to mobility, energy demand, industry and retail sales, foreign trade, commercial transactions from selected banks, and the national statistics agency’s (DANE) economic tracking indicator (ISE). Output is now expected to have declined annually in the first quarter by 0.3%. Private consumption likely continued to recover, registering levels somewhat above those from the previous year, while public consumption likely increased significantly. While a recovery in investment in both housing and in other buildings and structures is expected, overall investment levels in this case likely continued to be low, and gross fixed capital formation is expected to continue to show significant annual declines. Imports likely recovered to again outpace exports, though both are expected to register significant annual declines. Economic activity that outpaced projections, an increase in oil prices and other export products, and an expected increase in public spending this year account for the upward revision to the 2021 growth forecast (from 4.6% with a range between 2% and 6% in January, to 6.0% with a range between 3% and 7% in April). As a result, the output gap is expected to be smaller and to tighten more rapidly than projected in the previous report, though it is still expected to remain in negative territory on the forecast horizon. Wide forecast intervals reflect the fact that the future evolution of the COVID-19 pandemic remains a significant source of uncertainty on these projections. The delay in the recovery of economic activity as a result of the resurgence of COVID-19 in the first quarter appears to have been less significant than projected in the January report. The central forecast scenario expects this improved performance to continue in 2021 alongside increased consumer and business confidence. Low real interest rates and an active credit supply would also support this dynamic, and the overall conditions would be expected to spur a recovery in consumption and investment. Increased growth in public spending and public works based on the national government’s spending plan (Plan Financiero del Gobierno) are other factors to consider. Additionally, an expected recovery in global demand and higher projected prices for oil and coffee would further contribute to improved external revenues and would favor investment, in particular in the oil sector. Given the above, the technical staff’s 2021 growth forecast has been revised upward from 4.6% in January (range from 2% to 6%) to 6.0% in April (range from 3% to 7%). These projections account for the potential for the third wave of COVID-19 to have a larger and more persistent effect on the economy than the previous wave, while also supposing that there will not be any additional significant waves of the pandemic and that mobility restrictions will be relaxed as a result. Economic growth in 2022 is expected to be 3%, with a range between 1% and 5%. This figure would be lower than projected in the January report (3.6% with a range between 2% and 6%), due to a higher base of comparison given the upward revision to expected GDP in 2021. This forecast also takes into account the likely effects on private demand of a fiscal adjustment of the size currently being proposed by the national government, and which would come into effect in 2022. Excess in productive capacity is now expected to be lower than estimated in January but continues to be significant and affected by high levels of uncertainty, as reflected in the wide forecast intervals. The possibility of new waves of the virus (of uncertain intensity and duration) represents a significant downward risk to projected GDP growth, and is signaled by the lower limits of the ranges provided in this report. Inflation (1.51%) and inflation excluding food and regulated items (0.94%) declined in March compared to December, continuing below the 3% target. The decline in inflation in this period was below projections, explained in large part by unanticipated increases in the costs of certain foods (3.92%) and regulated items (1.52%). An increase in international food and shipping prices, increased foreign demand for beef, and specific upward pressures on perishable food supplies appear to explain a lower-than-expected deceleration in the consumer price index (CPI) for foods. An unexpected increase in regulated items prices came amid unanticipated increases in international fuel prices, on some utilities rates, and for regulated education prices. The decline in annual inflation excluding food and regulated items between December and March was in line with projections from January, though this included downward pressure from a significant reduction in telecommunications rates due to the imminent entry of a new operator. When controlling for the effects of this relative price change, inflation excluding food and regulated items exceeds levels forecast in the previous report. Within this indicator of core inflation, the CPI for goods (1.05%) accelerated due to a reversion of the effects of the VAT-free day in November, which was largely accounted for in February, and possibly by the transmission of a recent depreciation of the peso on domestic prices for certain items (electric and household appliances). For their part, services prices decelerated and showed the lowest rate of annual growth (0.89%) among the large consumer baskets in the CPI. Within the services basket, the annual change in rental prices continued to decline, while those services that continue to experience the most significant restrictions on returning to normal operations (tourism, cinemas, nightlife, etc.) continued to register significant price declines. As previously mentioned, telephone rates also fell significantly due to increased competition in the market. Total inflation is expected to continue to be affected by ample excesses in productive capacity for the remainder of 2021 and 2022, though less so than projected in January. As a result, convergence to the inflation target is now expected to be somewhat faster than estimated in the previous report, assuming the absence of significant additional outbreaks of COVID-19. The technical staff’s year-end inflation projections for 2021 and 2022 have increased, suggesting figures around 3% due largely to variation in food and regulated items prices. The projection for inflation excluding food and regulated items also increased, but remains below 3%. Price relief measures on indirect taxes implemented in 2020 are expected to lapse in the second quarter of 2021, generating a one-off effect on prices and temporarily affecting inflation excluding food and regulated items. However, indexation to low levels of past inflation, weak demand, and ample excess productive capacity are expected to keep core inflation below the target, near 2.3% at the end of 2021 (previously 2.1%). The reversion in 2021 of the effects of some price relief measures on utility rates from 2020 should lead to an increase in the CPI for regulated items in the second half of this year. Annual price changes are now expected to be higher than estimated in the January report due to an increased expected path for fuel prices and unanticipated increases in regulated education prices. The projection for the CPI for foods has increased compared to the previous report, taking into account certain factors that were not anticipated in January (a less favorable agricultural cycle, increased pressure from international prices, and transport costs). Given the above, year-end annual inflation for 2021 and 2022 is now expected to be 3% and 2.8%, respectively, which would be above projections from January (2.3% and 2,7%). For its part, expected inflation based on analyst surveys suggests year-end inflation in 2021 and 2022 of 2.8% and 3.1%, respectively. There remains significant uncertainty surrounding the inflation forecasts included in this report due to several factors: 1) the evolution of the pandemic; 2) the difficulty in evaluating the size and persistence of excess productive capacity; 3) the timing and manner in which price relief measures will lapse; and 4) the future behavior of food prices. Projected 2021 growth in foreign demand (4.4% to 5.2%) and the supposed average oil price (USD 53 to USD 61 per Brent benchmark barrel) were both revised upward. An increase in long-term international interest rates has been reflected in a depreciation of the peso and could result in relatively tighter external financial conditions for emerging market economies, including Colombia. Average growth among Colombia’s trade partners was greater than expected in the fourth quarter of 2020. This, together with a sizable fiscal stimulus approved in the United States and the onset of a massive global vaccination campaign, largely explains the projected increase in foreign demand growth in 2021. The resilience of the goods market in the face of global crisis and an expected normalization in international trade are additional factors. These considerations and the expected continuation of a gradual reduction of mobility restrictions abroad suggest that Colombia’s trade partners could grow on average by 5.2% in 2021 and around 3.4% in 2022. The improved prospects for global economic growth have led to an increase in current and expected oil prices. Production interruptions due to a heavy winter, reduced inventories, and increased supply restrictions instituted by producing countries have also contributed to the increase. Meanwhile, market forecasts and recent Federal Reserve pronouncements suggest that the benchmark interest rate in the U.S. will remain stable for the next two years. Nevertheless, a significant increase in public spending in the country has fostered expectations for greater growth and inflation, as well as increased uncertainty over the moment in which a normalization of monetary policy might begin. This has been reflected in an increase in long-term interest rates. In this context, emerging market economies in the region, including Colombia, have registered increases in sovereign risk premiums and long-term domestic interest rates, and a depreciation of local currencies against the dollar. Recent outbreaks of COVID-19 in several of these economies; limits on vaccine supply and the slow pace of immunization campaigns in some countries; a significant increase in public debt; and tensions between the United States and China, among other factors, all add to a high level of uncertainty surrounding interest rate spreads, external financing conditions, and the future performance of risk premiums. The impact that this environment could have on the exchange rate and on domestic financing conditions represent risks to the macroeconomic and monetary policy forecasts. Domestic financial conditions continue to favor recovery in economic activity. The transmission of reductions to the policy interest rate on credit rates has been significant. The banking portfolio continues to recover amid circumstances that have affected both the supply and demand for loans, and in which some credit risks have materialized. Preferential and ordinary commercial interest rates have fallen to a similar degree as the benchmark interest rate. As is generally the case, this transmission has come at a slower pace for consumer credit rates, and has been further delayed in the case of mortgage rates. Commercial credit levels stabilized above pre-pandemic levels in March, following an increase resulting from significant liquidity requirements for businesses in the second quarter of 2020. The consumer credit portfolio continued to recover and has now surpassed February 2020 levels, though overall growth in the portfolio remains low. At the same time, portfolio projections and default indicators have increased, and credit establishment earnings have come down. Despite this, credit disbursements continue to recover and solvency indicators remain well above regulatory minimums. 1.2 Monetary policy decision In its meetings in March and April the BDBR left the benchmark interest rate unchanged at 1.75%.