Trésor-Info - Publications de la direction générale du Trésor - Debt

How Strong Were the Finances of DTIB Companies Before the War in Ukraine?

2025-03-19T00:00:00+01:00

At a time of increasing international tension, the economic and financial position of companies “that help to design and produce equipment for armed forces” (i.e. the “defence technological and industrial base” or DTIB) is a major concern, particularly as regards small- and medium-sized enterprises.

To analyse the economic and financial position of these companies, France’s Economic Observatory for Defence and the Directorate General of the Treasury carried out a study covering the period from 2016 to 2021, looking at a sample of 2,072 companies (intermediate-sized, medium-sized and small enterprises) operating in sectors most closely associated with the DTIB.

During that period, DTIB companies (excluding large corporations and micro-enterprises) had a weaker financial and economic position than companies in the rest of the economy: they had thinner margins, were less able to create value, had higher debt levels and were potentially undercapitalised.

DTIB companies’ ability to repay debts was lower than that of comparable companies in the rest of the economy, but they had higher debt levels, suggesting that they had sufficient access to bank credit.

They made greater use of external funding in their equity capital formation, partly because they were less able to generate profits capable of strengthening their equity base.

However, since 2021, the increase in European defence budgets in response to the war in Ukraine, along with several public-sector initiatives – such as the creation of the European Defence Fund and the loosening of the European Investment Bank’s funding rules – have improved their growth outlook and therefore their financial health, although increased demand is also leading to increased funding needs.

The group of creditors of Cuba and the Government of the Republic of Cuba agree to amend the terms of the previous consolidation agreements

2025-01-23T00:00:00+01:00

The Vice Prime minister Ricardo Cabrisas, Bertrand Dumont, chair of the Paris Club, the Governor Juliana Delgado

During the meeting, the delegation of the Republic of Cuba described its country’s complex economic and financial situation and its underlying factors, and the main policies and measures implemented and to be implemented for a continued execution of its development plan.

This rescheduling provides the Republic of Cuba with better conditions to deal with its economic and financial difficulties in the next few years. It will also preserve the relationship with the member countries of the Group of Creditors of Cuba through the full implementation of previous consolidation agreements.

>> Read in French

Background note:

The Group of Creditors of Cuba includes Australia, Austria, Belgium, Canada, Denmark, Finland, France, Italy, Japan, the Netherlands, Spain, Sweden, Switzerland and the United Kingdom.

Useful links :

The Group of Creditors of Cuba and the Republic of Cuba agree to defer payments due under the 2015 agreement (10 June 2021)

Signing of the France - Zambia bilateral debt restructuring agreement

2024-12-09T00:00:00+01:00

Minister Situmbeko Musokotwane with Head of Department William Roos, Secretary to the Treasury Felix Nkulukusa, and Ambassador Thomas Rossignol

A historic agreement

This agreement marks a major step forward. It is the first bilateral agreement to implement the multilateral Memorandum of Understanding (MoU) signed between Zambia and its official creditors in October 2023. The latter is the first debt restructuring agreement negotiated under the aegis of the Common Framework, i.e., between Paris Club creditors and non-Paris Club G20 members on the one hand, and a borrowing country on the other. The main parameters of the USD 6 bn public debt treatment had been formalized at the level of the French and Zambian Heads of State and Chinese Prime Minister, at the Summit for a New Financial Pact in June 2023 in Paris.

Emmanuel Macron (France), Hakainde Hichilema (Zambia), Li Qiang (China) at the Summit on a New Global Financing Pact in Paris

As chair and secretariat of the Paris Club and co-chair of Zambia’s Official Creditors Committee, France played a central role in bringing these negotiations to a successful conclusion. The agreement on the MoU was made possible thanks to in-depth cooperation with Zambia, and the collective commitment of all the official creditors, whose work was co-chaired by France and China, with South Africa as vice-chair.

A significant debt treatment for a sustainable debt trajectory

The bilateral agreement will implement the restructuring the debt owed to France. Combined with the efforts of other creditors, it will help Zambia return to a sustainable debt path, in line with the objectives of the program supported by the International Monetary Fund.

This deal adds to the efforts already made by France to support Zambia in recent years. In response to the droughts caused by the El Niño phenomenon, France granted a budgetary aid of 16 million euros over two years (2023-2024) to finance emergency food programs.

The Official Creditors Committee (OCC) for Zambia includes: Belgium, China, Denmark, France, India, Israel, Italy, Japan, the Netherlands, the Russian Federation, Saudi Arabia, South Africa, Sweden, Switzerland, the United Kingdom, the United States.

How Dependent Are Emerging Market Economies on China's Growth?

2024-01-30T00:00:00+01:00

China is now the top export market for many emerging countries, as its average share of exports from these economies rose from 4% in 2002 to 12% in 2022. Additionally, the growth of outbound Chinese tourism has created new forms of dependence, especially for certain Asian countries.

Emerging economies are also financially dependent on China through commercial and sovereign loans. The main recipient sectors (energy, mining and transport) and regions (Asia and Africa for almost 60% of the loans) are in line with China’s strategic priorities, particularly in terms of its supply needs. China’s total outward foreign direct investment (FDI) flows remain low in relation to loans, but Chinese FDI accounts for a significant share of the FDI stock of several countries (Pakistan, Angola, South Africa and Thailand).

China’s slower medium-term growth – which the IMF has projected will fall to 4% over the next few years, down from 8% in the 2010s – will affect emerging economies through two primary channels. On the trade side, slower Chinese growth will result in (i) a decline in domestic demand and imports, and (ii) price and volume effects on commodities. On the finance side, China’s slowdown will play a role in the continued push, which began in 2015, to reduce the flow of its financing (loans and FDI) to emerging economies (see Chart), and in the country’s geographic and sectoral refocusing, as already reflected in the shift in the official stance regarding the Belt and Road Initiative (BRI). Asian countries and commodity-exporting countries are expected to be the most vulnerable to China’s structural slowdown due to their close trade ties with Beijing.

The Market for Safe Assets

2023-08-29T00:00:00+02:00

The holding of so-called “safe” assets, and the market for these securities more broadly, play a key role in maintaining financial stability. Yet there is no consensus as to how these assets are defined because the “safety” of a security depends on a number of different characteristics such as its stability, counter-cyclicality and liquidity, how transparently it is valued, and how solid its fundamentals are. The relative importance of these aspects varies according to investor preferences and financial-market conditions.

By examining how different asset classes perform against different safety criteria, it is possible to identify a universe of assets that can be considered “safe”, and to analyse developments in the market for these assets over the past two decades.

The supply of safe assets grew sharply in the 2010s, owing in part to sovereign bond issues. However, these assets became less readily available as central banks, especially in Europe, embarked on bond-buying programmes as part of a broader package of unconventional monetary policy measures. Despite increased supply, safe assets remained hard to come by throughout this period, as demand surged in both Europe and the United States, owing largely to the introduction of tighter prudential requirements in the wake of the 2008 financial crisis.

Globally, the market imbalance caused by these opposing forces has been partly redressed since the COVID-19 crisis of 2020, owing in large part to sovereign debt issues intended to fund pandemic support packages, which have had the effect of bringing the supply of safe assets into closer alignment with demand.

Looking ahead, the market could be affected by a number of major structural trends. Factors that could impact supply include the reshaping of the safe assets landscape amid the green transition, debt sustainability issues, rating downgrades and reform of the international monetary system. Meanwhile, demand could be influenced by developments such as the roll-back of unconventional monetary policy measures and changes to regulatory standards, especially those relating to non-bank financial institutions (NBFIs).

China's Public Finances: Short-Term Risks and Structural Issues

2023-05-23T00:00:00+02:00

Public finances have been a major driving force behind China’s growth, not least through public investment at the local level particularly since the 2008 crisis. In 2019, China’s public spending amounted to 24% of GDP according to official statistics, versus the 36% and 41% figures reported by the IMF and the OECD respectively.

Analysing China’s public finances is hindered by the lack of clarity in the definition of the prerogatives of various administrative levels (central, provincial, prefecture, county, city) in the Constitution of the People’s Republic of China and Chinese law, as well as by the fact that national laws often merely outline principles which are subsequently implemented at local level with significant leeway. The structure of public accounts is also based on opaque and complex methodology, lacking clarity on what spending falls within their scope, and the line between local and central government sometimes being blurred.

Public accounts structurally post a high level of deficit and debt. These two indicators have considerably worsened over the past few years, particularly as a result of the COVID-19 pandemic (see Chart). The situation at local level now emerges as a financial stability issue, with 57% of total government debt incurred at this level – according to official data – in a relatively
opaque way.

While local financial risks are high, a short-term systemic crisis seems unlikely given the guarantees granted by the central government and the fact that a large portion of the debt is held by major banks and local government entities.

Over the long term, imbalances and risks relating to public finances hamper growth and its necessary rebalancing, implying a shift from investments to domestic consumption. Despite the proactive stance of the authorities and the repeated recommendations of international observers, implementation of the reforms – a designated priority since 2013 – is still a slow and piecemeal process.

Live and (don't) let die: The impact of Covid-19 and public support on French firms

2021-04-20T00:00:00+02:00

The Working Paper series presents work carried out within DG Treasury, disseminated with the aim of enlightening and stimulating public debate. The authors are solely responsible for their work.

The Covid crisis has had a massive impact on the economy, especially on firms. The French Treasury has developed a microsimulation tool which allows to estimate the impact of the crisis, and of public measures taken in response to it, on financial health at the firm level. This tool is based on an accounting model similar to the one used in several publications, however it also integrates observed data at the firm level on the magnitude of the shock on firms and their use of the public support. In particular, it makes use of observed data on the evolution of the turnover, employment and payroll of firms, as well as their use of the short-time work scheme, the solidarity fund for SMEs and payroll taxes deferrals. Such a tool allows to simulate the evolution of illiquidity, insolvency and indebtedness at the firm level, taking into account the heterogeneity among firms. Results show that the financial health of firms has deteriorated in 2020 compared to a year without crisis, but public support – mostly the short-time work scheme and, for small firms, the solidarity fund – has considerably limited the increase in the number of illiquid or insolvent firms. Moreover, the impact of the crisis varies across industries and insolvency affects productive firms more than it does in normal times. Finally, the increase of firms’ debt in 2020 may impair investment during the recovery. Relying on a dynamic model of corporate investment under financial constraint, we estimate that the debt overhang caused by the crisis could reduce corporate investment by almost 2% during the recovery phase. However, a similar model shows that R&D spending could be more resilient to the deterioration of firms’ financial health.

Southern Africa Economic Dashboard

2018-07-17T00:00:00+02:00

A recovery in regional economic growth unevenly distributed among the countries of the region

The latest IMF data released in April 2018 (World Economic Outlook, April 2018) confirms an increase in sub-Saharan Africa economic growth from 0.7% in 2016 to 1.4% last year, which is higher (by 0.1 percentage point) to last October's forecast, and expect an upward trend with + 1.9% in 2018. Nevertheless, this recovery effect is very unequally distributed among the different countries of the zone: while some experienced relatively robust growth in 2017 (+ 4% in Malawi, + 3.6% in Zambia, + 3.1% in Lesotho, + 3% in Mozambique and Zimbabwe), that of South Africa remains modest (+ 1.3% after + 0.6%) and the other countries have seen their activity stagnate (0.2% in Swaziland , +0.7% in Angola) or even decrease (-1.2% in Namibia due to the slowdown in the construction sector, a very moderate recovery in mining activity and a weak Angolan demand) despite an improving global environment and the good recovery in commodity prices. In addition, the improvement in growth rates for 2017 possibly reflects the catching-up of 2016, particularly for Angola (-0.8 %), Swaziland (zero growth), South Africa (0.6 %) and Zimbabwe (0.7%).

For South Africa, the region's leading economy, growth, although still sluggish, has been well above the expectations of IMF analysts, who were still forecasting 0.7% last October: with 1.3% annual rate in 2017, it sharply accelerated compared to 2016, driven by the good performance of the financial, agricultural and mining sectors. The implementation of the new government, led by Cyril Ramaphosa, and the first measures taken (governance of public companies in particular) reassured foreign investors and prevented a deterioration of the rating agency Moody's, which had increased access costs to international financing.

In Angola, on the other hand, the performances are well below the forecasts established at the end of 2017: the rebound of oil production was less strong than envisaged, and growth only reached +0.7% against the + 1.5% expected. On the other hand, GDP /capita has started to rise in the country after 3 consecutive years of decline, but still remains below the level of 2013.

Improved weather conditions and rising world prices as key drivers of the economic recovery, with also a drop in key rates allowed by maintained inflation

In 2017, the two main drivers of economic recovery were improved weather conditions and rising global commodity prices. Indeed, most Southern African countries have a large agricultural sector (Lesotho, Malawi and to a lesser extent South Africa and Zimbabwe) and/or a mining sector providing the majority of their exports (Angola, Zambia, and Namibia especially, but also South Africa and Zimbabwe). On the one hand, the end of the drought has allowed the normalization of agricultural yields after the sharp declines observed in 2016. On the other hand, the rise in commodity prices has supported growth through increased exports, both in terms of value and volume (recovery of activity in some mines and opening of new ones). Since January 2017, the main mining and energy products have seen their price rise: + 6% for coal, + 12% for gold, + 19% for copper and up to + 30% for oil and + 40% for nickel, largely contributing to the reduction in the trade deficit of several countries.

In addition, monetary easing continues in the region : the policy rate was cut by 25 basis points in South Africa and Lesotho respectively in March and April 2018, by 50 bps in Zambia in February, by 125 bp in Mozambique in March 2018 and 200 bp in Malawi in December 2017. These successive decreases have been made possible by a favorable trend in inflation for several months in almost all countries, particularly those with very high levels of inflation : in Angola, inflation stands today at 20.9% against 36.5% at the same period last year, slowed nevertheless by the introduction of a floating exchange rate since the end of 2017 which caused a sharp devaluation of the Kwanza ; in Malawi it fell by almost 10 percentage points in 2017 while in Mozambique the rate fell from 20.6% in January 2017 to 3.1% last month. In Zimbabwe, on the other hand, inflation is on an upward trend due to electronic money creation. Thus, at the regional level, inflation is now 7.6% against 13.5% in early 2017, also as a result of the appreciation of most local currencies against major international currencies. As an indication, over the course of a year, the Rand appreciated by + 10.1% against the US dollar, the Botswana pula by + 8.5% and the Mozambican metical by + 17.8%, a sign of a slight renewed confidence of foreign investors, as well as an improvement in the economic context. The fall in key rates is good news in countries where the majority of loans are at variable rates, because it helps boost household consumption, lower the cost of credit for businesses and therefore contribute positively to growth. Central banks, however, remain cautious in the decline in interest rates (real rates are often high) particularly in view of the prospect of monetary tightening in the United States and the euro zone.

Finally, the recovery in global growth continues to have a positive effect on the economies of the region by pulling up their exports through an increase in external demand and by reducing their trade deficit. According to IMF data, overall growth is up + 3.8% in 2017, supported by a rebound in global trade, and is expected at + 3.9% for the coming year.

The fragility of public finances continues to weaken the economic situation of the countries, accentuated by the weakness of the diversification of activities and the anchor to South Africa’s economy

The question of the sustainability of public finances has been the main concern for Southern African countries in recent years : with the exception of Botswana, whose public debt amounts to only 15.6% of GDP in 2017, all the others countries in the region have either high levels (102.2% in Mozambique, 78.4% in Zimbabwe and 65.2% in Angola in 2017) and/or rising levels of public debt (+12 points in South Africa, +16 points in Malawi, +22 points in Namibia and +37 points in Zambia since 2012). In 2016, the deterioration of public finances was accentuated by the decline in revenues from the Southern African Customs Union (through the gradual decline in tariffs and the slowdown in the South African economy) which had deteriorated the current balance of already structurally deficit countries.

However, in 2017, all deficit countries saw their balance improve due to the better performance of tax revenues related to exports. Overall, the fiscal deficits remain relatively large and are leading to the creation of arrears in several countries, particularly in Mozambique, which has been in debt since the disclosure of hidden debts in 2016 and whose arrears are now accumulating at USD 710 million (approximately 5% of GDP). In Zimbabwe, the deficit was -9.6% in 2017, mainly because the announced measures to freeze salaries in the civil service were not taken. In Zambia, the effort of fiscal consolidation and reduction of arrears continues[1] but meanwhile, new investment projects threaten the sustainability of the public debt, with a risk deemed high by the IMF with which the discussions for a program are blocked.

Nevertheless, governments have put in place increasingly serious and credible fiscal consolidation measures with regard to different international organizations. In Angola, public spending decreased from 40 percent of GDP in 2013-14 to 21.4 percent in the 2018 finance bill, and wages remained almost flat, despite significant inflation in the country. In Mozambique, public spending was also reduced by 3.4 percentage points of GDP in fiscal year 2018/2019. Finally, in South Africa, the new budget in mid-February presented a sustainable budget path that has reduced the pressure exerted by rating agencies since mid-2016.

In addition, the fragility of public finances highlights the problem of the low level of diversification of economic activity in some countries, particularly in Zambia where 90% of exports are dominated by copper or in Malawi where the predominance of agricultural activity (29.5% of GDP) makes the country particularly vulnerable to climatic hazards and external shocks in general. In addition, the virtual stagnation of activity in South Africa in 2016 and the moderate recovery in 2017 penalized many countries that are still very dependent on the region's leading economy. In Namibia, export earnings fell sharply, with South Africa being the country's largest trading partner, and in Zimbabwe, transfers from Zimbabweans abroad fell from US $ 1,277 million in 2015 to US $ 1,105 million anticipated in 2017 as a result of sluggish South African activity (where the Zimbabwean diaspora is concentrated).

New governments in place in recent months seem to be aware of the need for structural reforms to improve the business climate and restore the confidence of foreign investors.

Beyond the necessary efforts to clean up public accounts, the development of the attractiveness of the country for foreign investors involves improving the environment of the business environment and launching reforms of public companies, which can now to be driven in many countries by the change of government. In Zimbabwe, the fall of Robert Mugabe, who has been in power for more than 30 years, suggests better prospects for improving the country's governance, while in South Africa, the election of Cyril Ramaphosa as head of the ANC has been very well received by the business community. These new leaders place at the center of their political agenda a reform of the governance of state-owned enterprises, together with a more efficient and transparent management of public finances. In Botswana, Mr. Mogkweetsi E. Masisi, the president elected in April 2017, has enshrined his government in the continuity of the previous power, both socially and economically, but with an economic policy a priori more open to foreign investment to accelerate the diversification of its economy. Finally, in Angola, the end of the dos Santos era suggests better prospects for transforming the structure of the economy. These reform efforts remain essential in order to restore the attractiveness of countries and attract new flows of foreign investment, down in recent years.

The deterioration of public finances as a factor in lowering the sovereign debt ratings of the different countries of the region

In 2017, for almost all southern African countries, sovereign ratings were lowered, placing them in the speculative category. In January 2017, Mozambique is placed in selective default by Standards & Poor's following the disclosure of hidden debt and the revaluation of the debt level, estimated at more than 100% of GDP. Then in April 2017, it is South Africa that sees its sovereign rating be degraded by one notch (from BBB- to BB +) in the speculative category by S & P, followed by a similar decision by Fitch a few days apart . The decision comes mainly in response to the large-scale cabinet reshuffle that President Zuma made on March 30 with the replacement of Pravin Gordham as Minister of Finance, and further deterioration occurred during the presentation of the multi-year budget in October 2017. Namibia was also doubly degraded by Moody's and Fitch (respectively in August and October) and ranked in the first tranche of the speculative category. Finally, during the summer, Angola's rating is lowered by both S & P (in August) and Moody's (in September) and is now one step above the "high risk" category. The poor ranking of all economies in the region (with the exception of Botswana, rated A2 by Moody's and A- by Fitch) is one of the factors behind the decline in FDI inflows in recent years and is thus depriving countries of access to international financing that would allow a revival of growth in a context of sluggish domestic demand and restriction of public investment. Prospects look more optimistic for 2018 with an increase in the outlook for Angolan and South African notes in March and April and a confirmation of the investment category for South Africa by Moody's.

Completed on May 25^th2018

[1] In Zambia, the public deficit trajectory is very different in cash accounting - which influences the dynamics of indebtedness - (5% in 2016, 7% in 2017 and 6% in 2018 where the deficit is increased by arrears reimbursement) and accrual accounting - which reflects the effort or not to reduce expenditures or increase revenues - (10% in 2016 when arrears accumulate, 5% in 2017 and 4% in 2018).