Academic literature on the topic 'Debt Contracting'

We study the role of borrower accounting quality in debt contracting. Specifically, we examine how accounting quality affects the borrower's choice of private versus public debt market and how the design of debt contracts vary with accounting quality in the two markets. We find that accounting quality affects the choice of the market, with poorer accounting quality borrowers preferring private debt, i.e., bank loans. This is consistent with banks possessing superior information access and processing abilities that reduce adverse selection costs for borrowers. We also find that accounting quality has an economically significant but differential impact on contract design in the two markets consistent with differences in recontracting flexibility across the two markets. In the case of private debt, since there is greater recontracting flexibility, both the price (i.e., interest) and non-price (i.e., maturity and collateral) terms are significantly more stringent for poorer accounting quality borrowers, unlike public debt where only the price terms are more stringent. The impact of accounting quality on interest spreads of public debt is 2.5 times that of the private debt, since the price terms alone reflect the variation in accounting quality.

Purpose The purpose of this paper is to examine the effect of a firm’s customer base concentration on its loan contract terms and how this effect varies with the strength of its customer relationship. Design/methodology/approach This study is an archival research based on a sample of US public firms that have loan contract data between 1990 and 2008. Major customer sales data are used to construct customer concentration and customer relationship measures. A debt contract model is employed to relate loan spread and other contract terms to customer concentration and relationship. Findings This study finds that firms with more concentrated customer bases have higher loan spread and shorter loan maturity and are more likely to issue secured loans. These negative effects disappear when the supplier firm maintains strong relationship with its customers. Research limitations/implications Additional forward-looking measure of customer relationship could benefit future research. Practical implications A firm’s customer base characteristics can have significant impacts on the terms of its loan contracts. Findings from this study support the notion that customer relationship is an important intangible asset that is informative to stakeholders of the firm. Originality/value This study proposes a new measure of customer relationship based on the past repeated relationships between a firm and its major customers. It shows that customer characteristics may affect firms’ contracts with creditors: customer base concentration increases credit risk whereas strong customer relationship improves credit quality.

CEO turnovers are important corporate events that can lead to significant changes within the firm. We find that CEO departures are associated with a subsequent increase in bank loan financing. The negative effect that CEO departures have on borrowing costs is largely driven by forced CEO turnovers. Following such departures, firms pay higher loan spreads, see an increase in covenants, and are more likely to be subject to collateral requirements, when compared to matched non-turnover and voluntary turnover firms. Evidence suggests that asset substitution and changes in accounting information quality help to explain the observed worsened terms following forced dismissals. On the other hand, more traditional voluntary departures are unrelated to changes in price and non-price loan terms.

While past work finds support for both higher and lower cost of debt among family firms, whether lower shareholder–creditor agency conflicts in family firms translate into greater ex-ante contracting efficiency (i.e., lower debt contract strictness) remains unexplored. Drawing on a shareholder–creditor agency framework and costly contracting theory, creditors, expecting firm value maximization rather than shareholder value maximization from family firms, may offer less strict debt contracts to increase contracting efficiency. We find in a sample of 716 publicly traded U.S. firms (2001–2010) that family firms have less strict debt contracts, which are even less strict when family firms have higher asset tangibility. Although increases in R&D investments could lead to more pronounced shareholder–creditor agency conflicts, given family firms' preferences for lower risk and growth, debt contract strictness among family firms is not positively associated with higher R&D intensity.

This study examines whether the provisions of a firm's bank debt contracts affect its accounting choices. Starting with a sample of firms who have bank debt and who also voluntarily changed accounting methods, we investigate whether the likelihood that the change in accounting method increased (rather than decreased) the borrower's income depends on (1) whether the change in accounting method affects the bank debt contract calculations, (2) the expected costs of violating the bank debt covenants, (3) whether performance pricing provisions affect the interest rate on the loan, and (4) whether the bank debt contract contains accounting-based dividend restrictions. After controlling for other motives for changing accounting methods, we find that borrowers whose bank debt contracts allow accounting method changes to affect contact calculations are more likely to make income-increasing rather than income-decreasing changes. This increase in likelihood of an income-increasing change is attenuated when expected costs of technical violation are lower because there is a single lender, and occurs for borrowers whose debt contacts have performance pricing and dividend restrictions. These results suggest that incentives to lower interest rates through performance pricing or to retain dividend payment flexibility influence borrowers' accounting method choices, thereby addressing the fundamental questions posed by Fields et al. (2001) of whether, under what circumstances, and how accounting choice matters.

This thesis consists of three studies that investigate the channels through which corporate governance reforms, accounting choice, and social capital influence contracting in the corporate bond market. In Chapter 1 (solo authored), I examine the public debt contracting consequences of shocks to managerial entrenchment. For identification, I exploit the mandatory adoption of board independence rules under the NYSE and NASD listing requirements as a regulatory reform that enhanced the intensity of CEO monitoring by independent directors. Using a large sample of corporate bond issues, I find that the rules induced economically significant contracting effects in non-compliant firms, namely in the form of lower payout, financing, and event-related covenants as well as higher credit ratings. In further tests, I show that while these effects are not mitigated by shareholder control, they ultimately depend on directors' private incentives and their ability and willingness to engage in costly monitoring. My findings speak to the debate on how equity-centric governance interacts with bondholders' interests and their incentives to impose long-term restrictions on firms' economic activities. Chapter 2 (co-authored with Peter Pope and Ane Tamayo) examines the contracting relevance of the balance sheet in the corporate bond market. Using "accounting bloat" in net asset values as a proxy for balance sheet quality, we predict and find that aggregate covenant intensity in bond indentures is negatively associated with the quality of issuers' balance sheet numbers. The magnitude of this effect is more pronounced for accounting and event-related covenants and is lower in the case of covenants that restrict payouts, refinancing, and investment activities. Our results are robust to controlling for corporate governance quality and the stringency of monitoring by lenders in syndicated loan deals. Turning to market outcomes, we find that offering yields, credit spreads, and credit ratings are decreasing in balance sheet quality, while the likelihood of agreement among credit rating agencies about new bond issues' credit risk increases with balance sheet quality. To establish a causal link between balance sheet quality and covenant structures, we exploit an exogenous court ruling in Delaware that substantially limits the fiduciary duties of directors to creditors. We show how the legal event affected bond issuers' reporting incentives and altered the debt contracting relevance of their balance sheet numbers. Finally, in Chapter 3 (co-authored with Kalr Lins, Henri Servaes and Ane Tamayo), we investigate whether a firm's capital, and the trust that it engenders, are viewed favourably by bondholders. Using firms' corporate social responsibility (CSR) activities to proxy for social capital, we find no relation between CSR and bond spreads over the 2005-2013 period. However, during the 2008-2009 financial crisis, which represents a shock to trust and default risk, high-CSR firms benefited from lower bond spreads. These effects are more pronounced for firms that, when in distress, have a greater opportunity to engage in asset substitution or divert cash to shareholders. High-CSR firms were also able to raise more debt capital on the primary market during this period, and those high-CSR firms that raised more debt were able to do so at lower at-issue bond spreads, better initial credit ratings, and for longer maturities. Our results suggest that bond investors believe that high-CSR firms are less likely to engage in asset substitution and diversion that would be detrimental to stakeholders, including debtholders. These findings also indicate that the benefits of CSR that accrued to shareholders during the financial crisis carry across to another important asset class, debt capital.

Submitted by Andre Espozel (andre.espozel@gmail.com) on 2017-04-19T17:47:32Z No. of bitstreams: 1 Dissertação - Andre Espozel - FGV-EPGE.pdf: 856389 bytes, checksum: 16cd3a3bbe1de2cc9ab98b718b21acb8 (MD5)
Approved for entry into archive by GILSON ROCHA MIRANDA (gilson.miranda@fgv.br) on 2017-05-04T12:58:29Z (GMT) No. of bitstreams: 1 Dissertação - Andre Espozel - FGV-EPGE.pdf: 856389 bytes, checksum: 16cd3a3bbe1de2cc9ab98b718b21acb8 (MD5)
Made available in DSpace on 2017-05-12T13:05:06Z (GMT). No. of bitstreams: 1 Dissertação - Andre Espozel - FGV-EPGE.pdf: 856389 bytes, checksum: 16cd3a3bbe1de2cc9ab98b718b21acb8 (MD5) Previous issue date: 2017-03-22
This papers tests theoretical predictions concerning to agent compensation, debt structure and investment in the models of dynamic agency in DeMarzo and Fishman (2007), DeMarzo and Sannikov (2006) and DeMarzo, Fishman, He and Wang (2012). The results related to agent compensation are consistent with the patterns predicted in the models, indicating that the firm-years that the models would have as more likely to pay dividends are indeed the ones more likely to pay; also, among firms that pay dividends, more profits generate higher dividend payments and higher executive compensation, as predicted in the models. The prediction that firms that go well and reach a payment threshold present marginal q equal to average q, and thus after controlling for average q cash flows would not explain investment is also supported by the tests in here. On the other hand, predictions related to the role of the credit line and to the debt structure are not compatible with the results in here. The credit line doesn’t seem to be the provider of financial slack that protects the firm from low cash flows and also doesn’t seem to have the dynamics of being paid when profits are high and being more used when profits are low.

Die vorliegende Arbeit untersucht in welchem Ausmaß Manager Optimismus finanzielle Entscheidungen von Unternehmen beeinflusst. Der erste Teil der Dissertation analysiert den Einfluss von Optimismus auf die Ausgabe von Fremdkapital. Optimistische Manager überschätzen die zukünftigen Erfolgsaussichten ihrer Firma. Daher könnten sie Verträge bevorzugen, die die Kuponzahlungen an die zukünftige Entwicklung des Kreditrisikos koppeln (sogenannte PSD Verträge). Diese Hypothese wird empirisch bestätigt. Ein weiteres Ergebnis der empirischen Analysen ist, dass in Firmen mit optimistischen Managern die Kreditqualität nach Ausgabe von PSD sinkt. Der zweite Teil untersucht den Zusammenhang zwischen Manager Optimismus und Spekulation mit Finanzderivaten in Unternehmen. Optimistische Manager, die ihre Fähigkeiten generell überschätzen, könnten irrtümlicherweise denken, dass sie mit Hilfe von Derivaten in der Lage sind den Markt zu schlagen und abnormale Renditen zu erzielen. Die Studie untersucht Derivatetransaktionen von Goldproduzenten in Nordamerika. Diese Industrie ist besonders interessant durch die ausführliche Ausweisung der Derivatepositionen und durch das klare Exposure zum Goldpreisrisiko. Das Ergebnis der Studie bestätigt die Hypothese dass optimistische Manager in größerem Ausmaß spekulieren und mit den Spekulationen letztendlich Verluste produzieren. Der letzte Teil der Arbeit untersucht die Auszahlungspolitik von Firmen mit optimistischen Managern. Optimistische Manager überschätzen durch ihre verzerrte Wahrnehmung den Wert der Firma und sollten daher eher zu Aktienrückkäufen als zu Dividendenzahlungen neigen. Die empirischen Ergebnisse der Arbeit bestätigen diese Voraussage. Optimistische Manager ersetzen Dividenden mit Aktienrückkäufen, das absolute Niveau der Auszahlungen unterscheidet sich jedoch nicht zwischen Firmen mit optimistischen und rationalen Managern.
This work analyses the impact of managerial optimism on financial policies of firms. The first part investigates the effect of optimism on debt contract design. Optimistic managers overestimate the credit quality of their firms and should be more likely to issue debt contracts that link coupon payments to the future credit risk of their firms (PSD contracts). This prediction is confirmed empirically. Further, firms with optimistic managers that issue PSD experience future deteriorations in their credit quality. The second part analyses the relation between managerial optimism and corporate speculation with financial derivatives. Optimistic managers overestimate their abilities and should be more likely to time markets because they believe that they have superior market timing abilities. The study uses data on North American gold producers because these firms disclose detailed data on their derivative positions and have a clear exposure to the gold price. The empirical results confirm the prediction that optimistic engage in more speculation with financial derivatives and that the cash flow resulting from speculation is lower relative to firms with rational managers. The last past analyses the relation between managerial optimism and a firm’s payout policy. As a consequence of their biased beliefs, optimistic managers perceive their firm’s equity as undervalued and should therefore be more likely to prefer share repurchases over cash dividends. The empirical analyses confirm this prediction: Firms with optimistic managers use more share repurchases relative to firms with rational managers. However, the total amount of payouts does not differ between firms with optimistic and rational managers.

Som en följd av Sveriges medlemskap i EU har offentliga upphandlingar kommit att få allt större betydelse eftersom de nu kan ske inom ett betydligt större geografiskt område än tidigare. En konsekvens av detta är att konkurrensen blivit allt hårdare och nya regler införs i takt med den snabba utvecklingen. Ett av resultaten av den hårda konkurrensen på upphandlingsmarknaden har visat sig vara att en del leverantörer lämnar anbud med onormalt låga priser för att vinna upphandlingskontraktet. Förekomsten av onormalt låga anbud i offentliga upphandlingar medför allvarliga negativa konsekvenser såsom att konkurrensen snedvrids, effektiviteten minskar och kostnaderna ökar. Detta påverkar både den upphandlande enheten, leverantören som bjudit onormalt lågt, de leverantörer som slagits ut samt konsumenterna. Att det saknas ett förbud i upphandlingslagstiftningen mot att anta onormalt låga anbud är därför allvarligt. Syftet med denna framställning är att undersöka innebörden av begreppet onormalt lågt anbud i offentliga upphandlingar, belysa problemet med och konsekvenserna av att lagstiftning och regelverk inte i tillräcklig utsträckning uppmärksammar de risker som kan vara förenade med antagandet av onormalt låga anbud samt försöka finna en lösning på problemet.

As a result of Sweden’s membership of the European Union, public procurement has gained more importance, mainly due to the larger geographic territory available. As a consequence of this, competition has become more aggressive and new rules are being incorporated into Swedish law in step with the fast development. One of the results of the tough competition in the public procurement market is that companies may be forced into potentially unsustainable under-bidding in order to win contracts. The presence of these abnormally low tenders in public procurement may have serious negative consequences such as distortion of competition and reduced efficiency, potentially causing delays and waste of resources in the procurement process. This will affect both the contracting authority, the tenderer that has won on an abnormally low bid, the other unsuccessful tenderers, and the ultimately consumers. The fact that public procurement law does not prohibit authorities from accepting abnormally low tenders is therefore potentially very serious. The main objective of this dissertation is to examine the significance of the concept of abnormally low tender, to illuminate the issues surrounding and consequences of the legislative lack of attention to the risks associated with accepting abnormally low tenders, and finally to propose solutions to these issues.

碩士
輔仁大學
會計學系碩士班
94
This study uses 2000~ 2004 listed companies to test whether the companes’ creditors examine the financial statements provided by the listed companies to check their earnings quality and decide the terms of the loan contracts and mitigate the risk of default. This research is the first one in Taiwan to examine the relationship between earnings quality and debt contracting. This thesis adopts absolute Jones-model, modified-Jones-model discretionary accruals and absolute total-accruals to proxy the earnings quality. Furthmore, this study uses loan rate, maturity, collateral to examines the the terms of the loan contracts. The empirical findings of this study are as follows: First, the larger the absolute Jones-model and modified-Jones-model discretionary accruals, the higher the loan rate. This results show that for a company with lower earnings quality, the interest rate will be higher to compensate the potential higher default of lenders and the cost of the borrowing will be higher, accordingly. Second, the larger the absolute Jones-model, modified-Jones-model discretionary accruals and absolute total-accruals, the shorter the maturity of the loan contracts. This evidences that in order to mitigate the high default risk of borrowers with poor earnings quality, the lenders will reduce the maturity of the borrowers’ loan contracts. Third, there are no relationships between the collateral requirements in the loan contracts and any earnings quality proxy variable. This shows that isted companies, maybe, almost borrow money by credit instead of by collateral results.

The Introduction surveys the development of Roman contract law through the Edict of the Urban Praetor and the writings of the Roman jurists. Emphasis is particularly on three concepts central to the overall architecture of Roman contract law: consensus (agreement); bona fides (good faith); and, to a more limited extent, causa (cause or reason for contracting). The law of contracts is placed in the more general framework of obligation and debt. This rich intellectual heritage relates directly to the character of the Roman economy as it developed from the archaic period to the Empire. Finally, the introduction discusses late imperial handling of Roman contract law.

This chapter examines the relationship between debt peonage and regional export development between 1876 and 1914 in four departments of Chiapas: Pichucalco, Chilón, and Palenque in the north of the state and Soconusco on the Pacific coast. All of these departments underwent considerable commercial development during the Porfiriato based on the production of tropical agricultural commodities such as coffee, cacao, rubber, and hard woods, and Soconusco, Palenque, and Chilón were recipients of significant foreign capital. However, the impact of market development on labour relations was not uniform: whereas in Soconusco plantation agriculture tended to undermine labour coercion, in the other departments these years saw the intensification and spread of servile peonage. The chapter shows that such changes were principally the product of regional market conditions and the capacity of the state to intervene in the process of labour contracting.

This chapter shows how the action of assumpsit for money, usually in the fictional form known as indebitatus assumpsit, was extended in the seventeenth century to cover situations beyond the reach of the old action of debt: for instance, actions on bills of exchange, actions for sums of money not quantified at the time of contracting (quantum meruit and quantum valebant), and restitutionary actions for money received to the plaintiff’s use. The last category overlapped with the action of account, but unlike account could be used against wrongdoers. Excessive use of ‘money had and received’ to replace the usual remedies in contract and tort was resisted, with only partial success, by Chief Justice Holt.

<p>The application of jointless bridges has been increasing year by year, because it could reduce the life‐cycle cost and improve the riding comfort. The approach slab in jointless bridges does not only have the function of road transition which is the same as the approach slab in bridges with expansion joints, but also transfer and absorb the deformation produced by the thermal expansion and contraction of the girder. The Grade Flat Approach Slab (GFAS) horizontally placed on the subgrade is one of the most common types of the approach slab in jointless bridges. The material placed between GFAS and subgrade should be able to properly slide to reduce the stress in GFAS. The friction coefficient between GFAS and sliding material is an important parameter affecting the mechanical behavior of GFAS in jointless bridges. In this paper, the tests of GFAS with different sliding materials subjected to horizontal displacement were conducted to obtain the corresponding friction coefficients (from 0.34 to 0.68). The mathematical model of bilinear spring could be adapted to simulate the friction function between GFAS and different sliding materials. One Deck‐Extension Bridge (DEB) that is one type of jointless bridges was chosen as a case study. The finite element model was implemented by using Midas‐Civil software. The influence of GFAS with different sliding materials on the mechanical properties of DEB under temperature variation was investigated. It can be concluded that the influence of the friction coefficient between GFAS and sliding material on the bending moment of DEB should be taken into account.</p>

Capitalism has faced the most severe and the longest crisis since 1929. Resource of the emerging financial crisis in the second half of 2007 was mortgage crisis that experienced in the United States. The collapse of housing market has caused great instability in the financial markets and then turned into the strong liquidity crisis and spread all over the world. The impact of global economic crisis on the world economies in the last quarter of 2008 was very fast and it occured in a devastating way. In this process, the asset prices declined, capital of financial institutions seriously damaged and this caused bankruptcy of many large financial organizations such as Lehman Brothers. In this context, the growth rates in the world fell down quickly, external demand contraction and global export decreased. At this point, developed countries applied large scale financial incentive packages. Especially, the Central Banks of developed countries have provided exceptional levels of liquidity that is used as a monetary policy tool by taking the risk of deterioration of their balance sheets. During this period, as a result of these policies followed by money and finance authorities have changed only the shape of global crisis and as a result the financial crisis has turned into a debt crisis. The effects of Global Economic Crisis on the Turkish economy emerged prominently in the last quarter of 2008. However, in comparison with many European countries, it is clear that all dynamics have became more favourable for Turkey after 2010.

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%.

2020 was an unprecedented year for Central America and the Dominican Republic. The effect of the global COVID-19 pandemic, exacerbated by the impact of Hurricanes Eta and Iota in some countries, caused the greatest economic contraction the region has undergone in its recent history - surpassing the debt crisis of the 1980s and the international financial crisis of 2009. In 2020, the IDB Group helped the countries in the region respond to these emergencies through approvals that exceeded US$ 4,900 million and disbursements of more than US$ 4,327 million, both reaching historical records. This report highlights the Groups main activities in Central America and the Dominican Republic in 2020 at the regional and country level.

The Colombian financial system has not suffered major structural disruptions during these months of deep economic contraction and has continued to carry out its basic functions as usual, thus facilitating the economy's response to extreme conditions. This is the result of the soundness of financial institutions at the beginning of the crisis, which was reflected in high liquidity and capital adequacy indicators as well as in the timely response of various authorities. Banco de la República lowered its policy interest rates 250 points to 1.75%, the lowest level since the creation of the new independent bank in 1991, and provided ample temporary and permanent liquidity in both pesos and foreign currency. The Office of the Financial Superintendent of Colombia, in turn, adopted prudential measures to facilitate changes in the conditions for loans in effect and temporary rules for rating and loan-loss provisions. Finally, the national government expanded the transfers as well as the guaranteed credit programs for the economy. The supply of real credit (i.e. discounting inflation) in the economy is 4% higher today than it was 12 months ago with especially marked growth in the housing (5.6%) and commercial (4.7%) loan portfolios (2.3% in consumer and -0.1% in microloans), but there have been significant changes over time. During the first few months of the quarantine, firms increased their demands for liquidity sharply while consumers reduced theirs. Since then, the growth of credit to firms has tended to slow down, while consumer and housing credit has grown. The financial system has responded satisfactorily to the changes in the respective demands of each group or sector and loans may grow at high rates in 2021 if GDP grows at rates close to 4.6% as the technical staff at the Bank expects; but the forecasts are highly uncertain. After the strict quarantine implemented by authorities in Colombia, the turmoil seen in March and early April, which was evident in the sudden reddening of macroeconomic variables on the risk heatmap in Graph A,[1] and the drop in crude oil and coal prices (note the high volatility registered in market risk for the region on Graph A) the local financial markets stabilized relatively quickly. Banco de la República’s credible and sustained policy response played a decisive role in this stabilization in terms of liquidity provision through a sharp expansion of repo operations (and changes in amounts, terms, counterparties, and eligible instruments), the purchases of public and private debt, and the reduction in bank reserve requirements. In this respect, there is now abundant aggregate liquidity and significant improvements in the liquidity position of investment funds. In this context, the main vulnerability factor for financial stability in the short term is still the high degree of uncertainty surrounding loan quality. First, the future trajectory of the number of people infected and deceased by the virus and the possible need for additional health measures is uncertain. For that reason, there is also uncertainty about the path for economic recovery in the short and medium term. Second, the degree to which the current shock will be reflected in loan quality once the risk materializes in banks’ financial statements is uncertain. For the time being, the credit risk heatmap (Graph B) indicates that non-performing and risky loans have not shown major deterioration, but past experience indicates that periods of sharp economic slowdown eventually tend to coincide with rises in non-performing loans: the calculations included in this report suggest that the impact of the recession on credit quality could be significant in the short term. This is particularly worrying since the profitability of credit establishments has been declining in recent months, and this could affect their ability to provide credit to the real sector of the economy. In order to adopt a forward-looking approach to this vulnerability, this Report presents several stress tests that evaluate the resilience of the liquidity and capital adequacy of credit institutions and investment funds in the event of a hypothetical scenario that seeks to simulate an extreme version of current macroeconomic conditions. The results suggest that even though there could be strong impacts on the credit institutions’ volume of credit and profitability under such scenarios, aggregate indicators of total and core capital adequacy will probably remain at levels that are above the regulatory limits over the horizon of a year. At the same time, the exercises highlight the high capacity of the system's liquidity to face adverse scenarios. In compliance with its constitutional objectives and in coordination with the financial system's security network, Banco de la República will continue to closely monitor the outlook for financial stability at this juncture and will make the decisions that are necessary to ensure the proper functioning of the economy, facilitate the flow of sufficient credit and liquidity resources, and further the smooth operation of the payment systems. Juan José Echavarría Governor