Evaluating the Potential of Asset Management Companies to Relieve Global Debt Distress: The Role of Development Finance Institutions

Multiple and overlapping crises have intensified debt vulnerabilities of emerging economies in recent years. In 2023, more than 60 countries are at or near significant debt distress, according to the International Monetary Fund (IMF) and the United Nations Development Programme (UNDP). Despite continued efforts by creditors and international communities, significant challenges remain for systematic and efficient resolution of debt distress and non-performing loans (NPLs) in emerging economies.

What novel approaches could be deployed to help resolve the developing country debt crisis?

In a new working paper, Ying Qian explores the extent to which the formation of asset management companies (AMCs) can be a viable option of the overall distressed debt resolution strategies and practices, beyond the national level. Qian argues AMCs, government entities set up to remove non-performing loans (NPLs) from banks’ balance sheets to preserve the viability of the financial system, can be a vehicle to directly involve multilateral development banks (MDBs) in debt relief operations. 

Main findings: 

• Lessons learned from AMC operations in the past suggest that AMCs can be an integral part of financial market infrastructure and play important roles in today’s distressed sovereign and non-sovereign debt situation. 
• AMCs can support effective services to emerging economies that are generally lacking capacities to deal with related issues.
• Additionally, they can provide market-based solutions at country, subregional, regional and global levels, with specialized professionals to leverage their technical know-how and carry out best practices. 
  • AMCs can play significant roles in adaptation and mitigation by establishing distressed debt resolution policies, legal environments and market infrastructure, developing specialized agencies and players and leveraging financial resources. 
• AMCs can help manage state-owned assets and help various sectors embrace climate change and a sustainable growth agenda.
• Development finance institutions, including domestic, bilateral and multilateral development banks and the World Bank, have the capacities and means to take the lead in directly engaging in AMC operations and nurturing the development of the AMC markets.  
• At regional and global levels, MDBs and the World Bank can play significant roles in resolving the debt crisis, if they consider adding AMC operations to their lines of operations, leveraging their professional expertise, operational efficiency and financial resources and playing an appropriate leadership role among all creditors and players. 
• Financially, it is possible for the African Development Bank (AfDB), Asian Development Bank (AsDB) and the World Bank to leverage their existing capital resources and add up to $800 billion of the NPL workout portfolio to their balance sheets. 
  • This number is already a large portion of the over $1.4 trillion total sovereign debt of developing countries. 

Expecting the overall NPL ratio in domestic financial markets and distressed sovereign debts to likely rise across most countries in coming years, existing national public AMCs and those to be established can be tasked with resolving NPLs and avoiding a large-scale failure of financial institutions. For Qian, an ideal world of distressed sovereign debt mitigation would have tiered structures of AMCs at country, regional, subregional and global levels, with all tiers working together and supporting each other. 

What is more, Qian argues MDBs like the World Bank, can show their leadership by establishing AMC subsidiaries to purchase NPLs in debt-laden countries and work together with domestic AMCs not only on immediate debt resolution at hand, but also on creating a multi-tiered infrastructure for the distress debt market, thus helping stakeholders better prepare and adapt ahead of future crises.