The Sovereign Debt forum (SDF) proposal aims to reduce the impediments that sovereign debtors and
their creditors face in proactively handling sovereign debt crises and to preserve value for stakeholders.

Many developing countries have pursued
export-oriented growth strategies over the
past three decades. The success of such
strategies depends on rapidly growing
global demand and the ability of a country
to enter market segments with high
demand growth and potential for
productivity growth. The onset of the
global crisis in 2008 disrupted the
favourable external economic environment
that had made export-oriented growth
strategies viable. Developing countries are
likely to face sluggish import demand for
their goods as a result of a protracted
period of slow growth in developed
countries. To avoid an ensuing slowdown
of their economic growth, developing
countries need to consider moving towards
a more balanced growth path and give
domestic demand a greater role in their
development strategies.

Historically, macroeconomic policies
have both stabilization and development
roles. However, since the 1980s the
focus of macroeconomic policies shifted
to stabilization alone. It is assumed that
low single digit inflation and low or no
budget deficits are both necessary and
sufficient conditions for growth and
development.

At a superficial level, the design of
macroeconomic policy for resource-rich
countries would seem a simple task. The
policy goals should be quite obvious: strong
growth, economic diversification and poverty
reduction. With rare exceptions, these
countries are not constrained by the supply of
foreign exchange, nor should the
governments be budget constrained. The
combination of obvious goals and relative lack
of constraints would seem to be a recipe for
success.

Consider a resource exporting country that
faces positive terms of trade shock (say
increased prices of exported resources) and/or
simultaneous inflows of capital. Or, imagine the
shock is negative – e.g., deterioration of the
current account and outflows of capital.

International capital flows are surging into
many emerging markets, driven by the push of
sluggish economic prospects for ailing
developed economies, combined with
relatively loose monetary policy and low
interest rates, and pulled by the much stronger
growth prospects in some “emerging market”
economies, especially in Asia and Latin
America. The IMF (2010, p. 67)
1
reports that
in the past four quarters, inflows into Asia
quadrupled relative to 2008 while total inflows
in dollar terms stand at near record levels
(Deutsche Bank, 2010, p. 4)2
. Latin America
has also experienced large swings in capital
flows with major outflows in 2008 and then,
in recent years, major capital inflows, much of
it portfolio, as in Asia (IMF, 2010. p. 81).3

Proposed prudential limits on public
debt-to-GDP ratios play a crucial role in
current debates on fiscal consolidation. Such
benchmarks typically come from technical
work by IMF staff, although these
benchmarks are not necessarily officially
endorsed by the IMF. Should these
proposed prudential limits on public debtto-GDP
ratios be treated as optimal for
designing fiscal policy?

In the wake of the financial crisis, concern
about the volatility of cross-border capital flows
has been expressed by the International Monetary
Fund, the G-20, and actors across the United
Nations system. In 2011, an expert task force was
convened to channel such concern toward
concrete policy proposals to help nations better
govern cross-border financial flows.1
This policy
brief summarizes the core findings and policy
recommendations coming out of the first report
of that task force.

The current wave of capital inflows to
emerging markets is influenced by the higher
returns that assets from these countries offer
in comparison with advanced countries. The
low rates of growth and interest rates in
advanced countries are most likely a transitory
phenomenon. Their real and financial yields
will probably both rise in the near future. In
any case, the high growth that emerging
markets have been experiencing since the
early 2000s should persist. Although the
growth rates of emerging markets and
advanced countries had shown a high
correlation since the 1950s, they diverged in
the 1970s, and then more recently in the
period of financial globalization (IMF, 2010)1
.
This trend has persisted during and after the
global financial crisis of 2007 to 2008.