Import substitution in India and crowding out of corporate bonds due to high state borrowing

Indian government to chart plan for higher investments

From The Times of India: The government is beginning to reach out to domestic and global investors to work out a strategy for higher investments and reduced reliance on imports in the post-Covid-19 world. During the lockdown, the commerce and industry ministry has had detailed discussions with a group of CEOs on boosting local production of several items, which are currently imported in large quantities, with work on an initial blueprint having begun. Sources told TOI that segments such as mobiles, air-conditioners, auto parts, specialised steel and aluminum products, power equipment, wooden furniture, along with food processing (with potato and orange in focus) are on the table.

Separately, Invest India, the government’s investment promotion agency, had identified over 1,000 global companies across sectors, whom it was reaching out to as part of the “China+1” strategy. “Globally, companies are realising that there is a need to diversify their production bases and India is being pitched as a possible destination. Our plan had slowed down due to Covid-19 but we are in talks with some of them,” a senior government officer told TOI.

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State Govt borrowers are crowding out cash-strapped firms in raising funds

From The Hindu Business Line: Indian companies struggling against the coronavirus pandemic and a domestic credit crunch are facing another obstacle: competition from state governments to sell debt. States are planning to crank up bond sales by 18.2% this quarter from a year earlier to make up for a decline in tax revenue due to an economic slowdown. They usually have lower credit risks than companies, and are offering higher yields than before, which could entice investors. The corporate bond market was already suffering, prompting the RBI on Friday to again inject more money into it. The demand for longer tenor corporate bonds from insurers and pension funds is expected to fall as they shift allocations to state bonds after the recent surge in yields, said Manoj Jaju, chief investment officer at Bharti AXA General Insurance Co. “We too will have a bias toward state bonds over corporate debt now.

[...] But recent cases show how state debt may be more appealing than company securities, even with the extra policy support. Maharashtra state is a case in point. It auctioned 10-year debt on April 7 with an annualized yield of 7.98%, the highest for that tenor since January last year. The latest rate was 44 basis points more than the yield on similar maturity AAA corporate notes. On the same day, REC Ltd., a state-owned financial firm, scrapped plans to sell notes because market participants demanded higher yields.

State bonds are also attractive because they have better trading liquidity in the secondary market compared with corporate securities, said Jaju at Bharti AXA. The State notes are accepted as collateral at the central bank’s repurchase auctions, unlike corporate bonds, providing an added incentive for investors, he said.

Fiscal stimulus equivalent to 5% of GDP needed in India

Triple trouble: coronavirus, hunger, and the economy

Sudipto Mundle writes in Mint: A package to restart the economy was announced on 15 April, with some graded easing after 20 April. These supply-side measures are welcome. But we also need to stimulate demand to get the economy going. My initial back-of-the-envelope calculations suggest that without a massive stimulus, the shutdown with a phased reopening could reduce GDP by around 10%in 2020-21.

Providing 2% of GDP extra expenditure for medical equipment and for temporary low-skill health workers, 2% of GDP for income support, and another 1% for extra food allocations would add up to a 5% of GDP fiscal stimulus. West Bengal Chief Minister Mamata Banerjee has recommended a 6%-of-GDP package. The multiplier effect of this 5-6% of GDP stimulus would reduce the recessionary impact of the lockdown significantly.

If GDP declines, it will reduce government revenue even if the existing tax exemptions and concessions are pared. The reduction of non-merit subsidies, totalling 5% of GDP, would at best offset the revenue decline. Hence, a 5-6%-of-GDP fiscal stimulus would have to be financed mainly through extra borrowing. To enable this, the current Fiscal Responsibility and Budget Management limits on Central and state government borrowing will have to be suspended. Under present global conditions, extra borrowings will mainly have to be financed from domestic sources. Such risk-less sovereign debt should be attractive for institutional investors, and its impact on domestic bond yields muted, since private sector demand for funds remains weak. Only in the unlikely event of commercial banks, including public sector banks, declining these bonds should the Reserve Bank of India step beyond its remit and monetize the deficit by directly acquiring them.

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COVID-19 crisis: Stimulus of 5% of GDP needed, says NITI Aayog

From Financial Express: Estimating the economic cost of the Covid-19 epidemic to be huge, the NITI Aayog has proposed a massive fiscal stimulus of over Rs 10 lakh crore or 5% of the gross domestic product (GDP) to address the situation. The package envisaged by the think tank includes income support to the poor, equity support to corporate India, absorption of a portion of NPAs in MSME sector and additional investments in healthcare. While the potential decrease in GDP size itself will raise the Centre’s fiscal deficit expressed as fraction of it to 4% in FY21 from the budgeted 3.5%, the proposed fiscal stimulus could widen it to an unheard-of 10.5% of GDP.

Given that the Centre’s fiscal resources are constrained, the Reserve Bank of India (RBI) may need to finance a portion of this incremental government stimulus, the government think-tank said. The special spending could be ring-fenced within a special Covid-19 budget, rather than as part of the general budget, it added. “Not implementing a concerted stabilisation package in a timely fashion may lead to a far greater damage to livelihoods, the economy and the financial sector, with far worse macro-economic consequences… debt-to-GDP could still rise to 95-100% due to reduced GDP,” the think tank’s CEO Amitabh Kant said in a presentation to the CII.

[...]Niti Aayog cautioned that unemployment risk and social unrest could rise materially with possible displacement of over 3 crore workers. It also warned that solvency risk to the financial system is high if the economic impact is not mitigated in the next 2-3 months. With incremental NPA across banks and NBFCs to be Rs 8.1 lakh crore or 7.3% (of advances) if lockdown continues till mid-May (the government has already extended it till May 3), the NITI Aayog said the core Tier 1 capital of banks will be around 12% or only slightly more than net unprovided NPAs of 10.9%.

[...]The Niti Aayog suggested income support programme of Rs 3.1 lakh crore to 6 crore permanent and contractual workers in the corporate sector and 13.5 crore informal workers and contractors. It also estimated Rs 70,000 crore additional expenditure in healthcare. Among other big fiscal sops, it suggested Rs 2.3 lakh crore capital support (preferably equity) to large corporates in a troubled asset relief programme (TARP) and Rs 1.7 lakh crore credit guarantee fund to absorb likely NPA slippage and credit costs. Certain proposals with no fiscal impact suggested include Rs 2.5 lakh crore RBI forbearance to reduce capital constraints (by rolling back capital conservation buffers) and Rs 1 lakh crore equity support to banks, housing finance companies and NBFCs via a TARP.

Besides the fiscal stimulus, shortfall of Rs 2 lakh crore in tax revenues, Rs 1.1 lakh crore in disinvestment receipts and additional stimulus in the form of payment of governments’ unpaid dues, will push the Centre’s fiscal deficit to Rs 21.1 lakh crore in FY21, the Niti Aayog said. With states’ projected fiscal deficit at 2.6% (to rise significantly as they will spend more and revenues will falter), the combined fiscal deficit of the Centre and states would be 13.1% in FY21, it added. The combined deficit should have been less than 6% in business-as-usual scenario.

RBI announces further measures to boost liquidity

Since February 2020, the RBI has rolled out plans to inject liquidity equivalent to 3.2% of GDP. The RBI has also undertaken targeted long term repo operations (TLTRO), which allows banks to borrow one to three year funds from RBI at the repo rate by providing government securities with similar or higher maturity as collateral.

Here are the additional measures taken by the RBI on 17 April 2020 to maintain adequate liquidity, facilitate and incentivize bank credit flows, ease financial stress, and enable normal functioning of markets. 

Liquidity management

• TLTRO 2.0: INR 50,000 crore of TLTRO in tranches of appropriate sizes. The funds availed by banks under TLTRO 2.0 should be invested in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs, with at least 50 per cent of the total amount availed going to small and mid-sized NBFCs and MFIs. Investments made by banks under this facility will be classified as held to maturity (HTM) even in excess of 25 per cent of total investment permitted to be included in the HTM portfolio.
• Refinancing facilities for All India Financial Institutions (AIFIs): Special refinance facilities for a total amount of INR 50,000 crore to National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), and  National Housing Bank (NHB) to enable them to meet sectoral credit needs. Specifically, INR 25,000 crore to NABARD for refinancing regional rural banks (RBBs), cooprative banks and micro finance institutions. INR 15,000 crore to SIDBI for on-lending/refinancing. INR 10,000 crore to NHB for supporting housing finance companies. Charges set at RBI's policy repo rate. 
• Liquidity adjustment facility: Fixed rate reverse repo rate: Reduce fixed rate repo rate under LAF by 25 basis point from 4% to 3.75%, which will encourage banks to use surplus funds in investments and loans in productive sectors. Due to various liquidity enhancement measures taken by RBI, banks now have surplus liquidity. On April 15, it absorbed INR 6.9 lack crore through reverse repo operations. No change in policy repo rate (4.4%), and MSF and bank rate (both at 4.65%).
• Ways and means advances for states: WMA limit of states increased by 60% over and above the level as on 21 March 2020. On April 2, the RBI set it at 30%. This will be available till September end. 

Regulatory measures

• Asset classification: Institutions granting moratorium or deferment of loans can exclude the moratorium period from the 90-day NPA norm, i.e. there would be an asset classification standstill for all such accounts from March 1 to May 31, 2020. NBFCs can provide such relief to their borrowers too. However, to reduce building up of risk in banks' balance sheets, they they will have to maintain higher provision of 10% on all such accounts under the standstill, spread over two quarters, i.e., March, 2020 and June, 2020. These provisions can be adjusted later on against the provisioning requirements for actual slippages in such accounts.
• Resolution timeline extension: The period for resolution of stressed assets extended by 90 days. Currently, all banks, AIFIs, and NBFCs are required to hold an additional 20% if a resolution plan has not been implemented within 210 days form the date of default.
• Dividend distribution: Scheduled commercial banks and cooperative banks are not allowed to make any further dividend payouts from profits pertaining to the financial year ended March 31, 2020 until further instructions. This is done to maintain enough capital to absorb losses amidst heightened uncertainty.
• Liquidity coverage ratio: LCR requirement for Scheduled Commercial Banks is being brought down from 100 per cent to 80 per cent with immediate effect. The requirement shall be gradually restored back in two phases – 90 per cent by October 1, 2020 and 100 per cent by April 1, 2021. 
• Relief for NBFCs on real estate sector loans: Date of commencement of commercial operations can be extended by one year over and above teh one-year extension permitted during normal times without treating them as restructuring. This facility was earlier available to banks only.

On 26 March, the government announced $23 billion Pradhan Mantri Garib Kalyan Yojana to targeting the vulnerable groups.

Spend on the poor now and do not worry much about fiscal cost

Amartya Sen, Raghuram Rajan, Abhijit Banerjee write in The Indian Express that a combination of loss of livelihoods and interruptions in standard delivery mechanisms will push a huge number of people into dire poverty. The core message is that the government should expand social protection measures (food subsidy, cash transfers) and not worry about cost right now. Perhaps, as Paul Samuelson said "every good cause is worth some inefficiency". 

Here is excerpt from their article:

[...]As it becomes clear that the lockdown will go on for quite a while, in a total or a more localized version, the biggest worry right now, by far, is that a huge number of people will be pushed into dire poverty or even starvation by the combination of the loss of their livelihoods and interruptions in the standard delivery mechanisms. That is a tragedy in itself and, moreover, opens up the risk that we see large-scale defiance of lockdown orders — starving people, after all, have little to lose. We need to do what it takes to reassure people that the society does care and that their minimum well-being should be secure.

We have the resources to do this; the stocks of food at the Food Corporation of India stood at 77 million tons in March 2020 — higher than ever at that time of the year, and more than three times the “buffer stock norms”. This is likely to grow over the next weeks as the Rabi crop comes in. The government, recognizing the disruptions to the agricultural markets from the lockdown, is more than usually active in buying the stocks that the farmers need to get rid of. Giving away some of the existing stock, at a time of national emergency, makes perfect sense; any sensible public accounting system should not portray it as inordinately costly.

[...]More importantly, a substantial fraction of the poor are excluded from the PDS rolls, for one reason or another (such as identification barriers to get a ration card that turn out to be hard to overcome), and this supplementary provision only applies to those who are already on it. For example, even in the small state of Jharkhand, there are, we are told, 7 lakh pending applications for ration cards. There is also evidence that there are a lot of bona fide applications (for example of old-age pensioners) held up in the verification process, partly because the responsible local authorities try to avoid letting anybody in by mistake to avoid any appearance of malfeasance. Such punctiliousness has its merits, but not in the middle of a crisis. The correct response is to issue temporary ration cards — perhaps for six months — with minimal checks to everyone who wants one and is willing to stand in line to collect their card and their monthly allocations. The cost of missing many of those who are in dire need vastly exceeds the social cost of letting in some who could perhaps do without it.

[...]Starvation is just one of the worries; the unexpected loss of income and savings can have serious consequences, even if the meals are secured for now: farmers need money to buy seeds and fertilizer for the next planting season; shopkeepers need to decide how they will fill their shelves again; many others have to worry how they would repay the loan that is already due. There is no reason why, as a society, we should ignore these concerns.

[...] as a part of the commitment to not miss the needy, there has to be funding available that state and local governments can use to find effective ways to reach those who suffer from extreme deprivation.

MSMEs in India, microfinance institutions in trouble and more

India: Bring in the MSME relief package

From The Economic Times: The MSME sector accounts for about 40% of exports and almost a third of national output, and it is critical to address loss of revenue so as to purposefully avoid closure of units and damage to livelihoods. An estimated 6.3 crore MSME units employ 11 crore persons across the country, and it is only fitting that the sector is provided credit guarantees and interest subventions to survive the lockdown. True, the Small Industries Development Bank of India (Sidbi) has announced emergency loans at a concessional interest of 5%, but these are only meant for MSMEs manufacturing products or delivering services to fight the coronavirus pandemic. A far more comprehensive coverage is surely warranted. It has also been reported that public sector banks are extending emergency lines of credit to MSME borrowers, of up to 10% of their working capital limits. But much larger loans are required to tide over the present crisis in earnings capacity.

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Moratorium on loans critical for microfinance institutions: Icra

From Mint: Microfinance institutions (MFIs) could be heading for troubled times. If they don’t get a moratorium on their loans, their debt-servicing obligations could be severely impacted, according to a note released by credit rating agency Icra. The credit rating agency analyzed a sample of 29 MFIs, which makes up for 70% of the industry portfolio.

Collectively, these institutions have operation expenditures and repayment obligations of ₹8,000 crore in the first quarter of the financial year 2021. However, their on-balance sheet liquidity buffer stood at ₹5,400 crore. These institutions are facing a shortfall of ₹2,600 crore in the absence of any external funding support. “As the collections from borrowers could remain muted for some time post the lockdown is eased, the industry stares at a cash shortfall of ₹2,600 crore, according to our estimates," the Icra note said.

[...]The strain on borrowers’ cash flows will lead to a build-up of arrears, dilution of credit discipline, migration of borrowers owing to loss of livelihoods and the possibility of local, or political issues.

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Fiscal and monetary policy: It takes two to tango

Sajjid Z. Chinoy writes in Mint: Fiscal-monetary coordination is often misconstrued to simply mean a monetization of the deficit. In India, any monetization remains an academic debate for now. Amid unprecedented uncertainty, without knowing the size of the economic shock, how automatic stabilizers on the budget will react, and what the absorptive capacity of the market will be, it’s virtually impossible to assess any funding gap. But that’s not to say fiscal and monetary don’t have other opportunities to co-ordinate in the interim. There are a plethora of opportunities and synergies.

The first task should be to enable the Centre and states to borrow from markets in a non-disruptive manner. Here, there’s some disquieting news. Three weeks after the Reserve Bank of India (RBI) unleashed its bazooka, monetary conditions have begun to tighten again. The glut of interbank liquidity (almost ₹7 trillion) has pushed interbank overnight rates to just 2-3%. Yet, the 10-year GSec recently hardened to a 2-month high of 6.5%. This is now the steepest yield curve in a decade. Meanwhile state yields have firmed to the 7.7-8% range—twice the typical spread over GSec yields.

Given the abundant system liquidity and weak credit growth, what explains this? It’s because in recent years, banks have revealed a growing aversion to long-dated government bonds (“duration risk"). This is because banks’ holding of bonds is much above statutory limits (the corollary of soft credit growth in recent years), exposing them to interest rate risk. The longer the duration, the greater the “mark-to-market" risk—losses which impinge upon (often scarce) banking capital. It’s this disinclination to buy “duration", a behaviour exacerbated by increased market volatility, that underpins the hardening of yields.

What can policy do? 

• First, given the unprecedented uncertainty, policymakers could consider granting temporary forbearance to banks on their “mark-to-market" accounting (e.g. temporarily increase “hold-to-maturity" on which there is no interest rate risk).
• Second, the “ways and means" advances for states could temporarily be increased further so that states’ near-term market borrowing temporarily reduces. 
• Third, RBI often needs to buy government bonds to create base money just to support activity in the normal course of events.As households begin to hoard cash, we expect “currency-in-circulation" to rise by 1% of GDP this year. So RBI will have potentially meaningful space to buy government bonds 
• Expenditure will therefore have to be ruthlessly prioritized, akin to a “war-time" effort, and must focus squarely on boosting healthcare capacity, support for the needy (in cash and kind), funding automatic stabilizers like the Mahatma Gandhi Rural Employment Guarantee Act scheme, and back-stopping the financial sector (credit guarantee and re-capitalization funds). 

Normal monsoon forecast, risk aversion in bond market, and debt relief for poor countries

India to get normal monsoon, says IMD as country battles coronavirus

From Business Standard: India is likely to have a normal monsoon this year, the country’s weather department said on Wednesday giving the country’s coronavirus-battered economy some good news. Monsoon rains are expected to be 100 per cent of a long-term average, M. Rajeevan, secretary at the Ministry of Earth Sciences told a news conference, according to news agency Reuters.

The India Meteorological Department (IMD) defines average, or normal, rainfall as between 96 per cent and 104 per cent of a 50-year average of 88 centimetres for the entire four-month season beginning June. Monsoon enters Kerala coast on June 1, covers much of central and western India between June 5 and 15, and enters North India from July 1. It is crucial to rice, wheat, sugarcane and oilseeds cultivation in the country, where farming accounts for about 15 per cent of the economy and employs over half of its people.

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Risk aversion: Bond sell-off brings down FPI utilisation of G-sec limits to 52%

From Financial Express: With continuous selling in central government securities by foreign portfolio investors (FPIs) due to persistent risk aversion in the wake of the Covid-19 crisis, general category FPI utilisation of investment limits in G-secs have fallen to 52.31% as on April 13 compared to the peaks of over 75% at the beginning of 2020. In the last 18 consecutive sessions, FPIs have sold Indian bonds – including both G-secs and corporate bonds  – worth $8.8 billion, Bloomberg data show. Following the continuous selling by foreign investors, general category FPI investments in G-secs currently stand at just over $17 billion against the total available investment limits worth over $32 billion, CCIL data show.

Manish Wadhawan, managing partner at Serenity Macro Partners, said that markets are a bit wary of the potential spike in fiscal deficit this year. “We saw FPI selling in equities halting a bit in recent times but the selling has continued in debt. I believe FPI fund flows will depend a lot on the fiscal and currency views. Even when foreign investors decide to make a comeback to emerging markets, they will have options to invest in the debt of other countries like Korea and China. The only turning point India can see would be if the RBI decides to conduct open market operations (OMOs) or decides to buy bonds directly in the primary central and state government auctions,” Wadhawan said.

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G20 agrees debt freeze for world's poorest countries

From Reuters: Finance officials from the Group of 20 major economies agreed on Wednesday to suspend debt service payments for the world’s poorest countries from May 1 until the end of the year, as a group of private creditors also backed offering debt relief. The moves to freeze both principal repayments and interest payments will free up more than $20 billion for the countries to spend on their health systems and help tackle the coronavirus pandemic, Saudi Finance Minister Mohammed al-Jadaan said.

[...]German Finance Minister Olaf Scholz called the move “an act of international solidarity with a historical dimension,” adding it would let the countries invest in healthcare “immediately and without time-consuming case-by-case examination”. A source familiar with the agreement said it would cover $12-$14 billion in bilateral debt service payments.

The G20 also called on private creditors to participate in the initiative on comparable terms. The Institute of International Finance, which represents 450 banks, hedge funds and other global financial firms, said it would recommend that private sector creditors voluntarily grant similar debt relief to the poorest countries, if they requested it. A French finance ministry official on Tuesday said private creditors had agreed voluntarily to roll over or refinance $8 billion of the debt of the poorest countries, on top of $12 billion in debt payments to be suspended by countries.

COVID-19 induced recession worst since the Great Depression

In the latest World Economic Outlook (April 2020), the IMF projected global growth to contract sharply to -3% in 2020. The cumulative loss to global GDP over 2020 and 2021 from the pandemic crisis could be around 9 trillion dollars, greater than the economies of Japan and Germany, combined. For the first time since the Great Depression both advanced economies and emerging market and developing economies are in recession. It argues that many countries face a multi-layered crisis comprising a health shock, domestic economic disruptions, plummeting external demand, capital flow reversals, and a collapse in commodity prices.

Under the assumption that the pandemic and required containment peaks in the second quarter for most countries in the world, and recedes in the second half of this year, in the April World Economic Outlook the IMF projects global growth in 2020 to fall to -3 percent. This is a downgrade of 6.3 percentage points from January 2020. This makes the Great Lockdown the worst recession since the Great Depression, and far worse than the Global Financial Crisis.

Assuming the pandemic fades in the second half of 2020 and that policy actions taken around the world are effective in preventing widespread firm bankruptcies, extended job losses, and system-wide financial strains, the IMF projects global growth in 2021 to rebound to 5.8 percent.

In an adverse scenario, the pandemic may not recede in the second half of this year, leading to longer durations of containment, worsening financial conditions, and further breakdowns of global supply chains. This could mean even greater fall in global GDP: an additional 3 percent in 2020 (below the baseline in 2002) if the pandemic is more protracted this year, while, if the pandemic continues into 2021, it may fall next year by an additional 8 percent compared to our baseline scenario.

The IMF recommends that countries continue to spend generously on their health systems, perform widespread testing, and refrain from trade restrictions on medical supplies. It also recommends continued support to households and businesses throughout the containment period: credit guarantees, liquidity facilities, loan forbearance, expanded unemployment insurance, enhanced benefits, and tax relief. During the recovery phase, policies should shift to supporting demand, incentivizing firm hiring, and repairing balance sheets in private and public sector. It recommends moratoria on debt repayments and debt restructuring to be continued during the recovery phase too. 

Substantial targeted fiscal, monetary, and financial measures to maintain the economic ties between workers and firms and lenders and borrowers is required to keep intact the economic and financial infrastructure of society. Meanwhile, broad-based stimulus and liquidity facilities to reduce systemic stress in the financial system can lift confidence and prevent an even deeper contraction in demand by limiting the amplification of the shock through the financial system and bolstering expectations for the eventual economic recovery.

INDIA: 

• The IMF has projected India’s economy to grow at 4.2% in 2019/20, 1.9% in 2020/21 and then quickly recover to 7.4% in 2021/22. 
• Inflation is projected to remain low at 3.3% in 2020/21 and 3.6% in 2021/22. 
• Current account balance is projected to narrow to -0.6% of GDP in 2020/21 and then increase to -1.4% of GDP in 2021/22.

NEPAL:

• The IMF has projected Nepal's economy to grow at 2.5% in 2019/20 and 5% in 2020/21. 
• Inflation is projected to remain at 6.7% in FY2020 and FY2021. 
• Current account balance is projected to be -6.5% in FY2020 and -6.2% in FY2021.

Policy measures for the immediate-term:

• Sizable, specific, temporary, and targeted fiscal measures to cushion the impact on the most affected households and businesses, and to preserve economic relationships (by reducing firm closures). Digital payments may improve the delivery of targeted transfers to the informally employed.
• Central banks can provide ample liquidity to banks and nonbank finance companies, and credit guarantee on loans to SMEs. It could also encourage banks to renegotiate loan terms for distressed borrowers without lowering loan classification and provisioning standards. Beyond conventional interest rate cuts, expanded asset purchase programs may be helpful. 
• Broad-based fiscal stimulus such as public infrastructure investment or across-the-board tax cuts can help to boost confidence, stimulate aggregate demand, reduce bankruptcies and avert an even-deeper downturn. 
• Flexible exchange rates should be allowed to adjust as needed. Temporary capital flow measures on outflows could be useful.

Policy measures for the recovery phase:

• Secure swift recovery as even after the containment phase, uncertainty about contagion could subdue consumer demand. Firms will hire staff and utilize capacity gradually. Hiring subsidies may be required and worker retraining programs may alleviate labor market friction. Scaling back targeted, temporary measures may be warranted. 
• Balance sheet repair and debt restructuring may be required. Banks and regulators should encourage early and proactive recognition of nonperforming loans. Steps to strengthen the insolvency and debt enforcement framework, and measures to facilitate the development of a distressed debt market could be helpful.
• Strong multilateral cooperation is a must, especially on international trade and multilateral assistance.