CLASSIFICATION OF DEBT BY
RESIDENCE OF THE CREDITOR
1. Domestic/external debt can be identified either by residence or debt currency.
2. All institutional units located in an economic territory are residents of that economy.
3. External holders of debt securities are identified by the law of issuance rather than residence.
The residence of the creditor allows to distinguish do-
mestic resident creditors from external resident credi-
tors. It is the criterion used by international standards
on debt statistics to differentiate domestic debt from
external debt:
 Debt liabilities owed by resi- It is the creditor’s
dents to residents of the same residence, not the
economy are domestic debt. currency in which
the debt is issued,
 Debt liabilities owed by resi- which defines the
dents of an economy to non- debt as domestic or
external.
residents are external debt.
Residence is not based on nationality or
legal criteria. It is defined as the eco-
nomic territory with which an insti-
tutional unit has the strongest con-
nection, that is, its center of predomi-
nant economic interest.
This definition has two dimensions:
The economic territory: it is the area
under the effective economic control of a
single government; it includes the land area,
airspace, and territorial waters. It includes
territorial enclaves such as embassies, con-
sulates and military bases: although located
abroad, they are not subject to the laws of
the host country. Special zones such as free
The External Debt Statistics: Guide for Compilers and
Users states that:
“Gross external debt, at any given time, is the out-
standing amount of those actual current, and not con-
tingent, liabilities that require payment(s) of principal
and/or interest by the debtor at some point(s) in the
future and that are owed to nonresidents by resi-
dents of an economy.”
As external debt involves transfer of resources from
non-residents to residents, it is usually associated
with vulnerabilities which may expose countries to
debt crises. This is why external borrowing has been
traditionally the focus of debt analysis in developing
countries.
trade zones and offshore financial centers are also
included, as these are under the control of the gov-
ernment and therefore part of the economy, even
though different regulatory and tax regime may apply.
The center of predominant economic interest:
it refers to the conduct or intention to conduct eco-
nomic activities for one year or more, from
some location (dwelling, place of produc-
tion or other premises) within the econom-
ic territory of the economy. In essence, an
institutional unit is a resident of the econo-
my in which it is located. Therefore, a
branch or subsidiary that engages in econo-
my activity and transactions from an econo-
my territory is a resident of that economy.
The more recent switch from external to domestic
borrowing redirected the focus on the risk faced by
the public sector with its private creditors, both for-
eign and domestic.
The Public Sector Debt Statistics: Guide for Compilers and
Users states that:
“Total public sector debt consists of all debt liabilities
of resident public sector units to other residents
and non-residents.”
The residence criterion is used here both for debtor
and creditor units and is one of the breakdowns used
for the public sector debt:
Classifying as external debt bonds issued in the international market (or issued under foreign law) and classifying as
domestic debt bonds issued in the domestic market (or issued under national law), although current practice in a
number of countries, is not in accordance with international standards.
In DMFAS, the residence (domestic/external) is auto-
matically derived based on the information entered in
the Participant Reference File, specifically the country
of the participant.
The creditor’s residence is quite difficult to deter-
mine in an environment where most external debt
due to private creditors takes the form of tradable
debt securities (e.g. bonds). This involves identifying
the residence of the buyer of the debt securities in
the primary market and being able to track the ulti-
mate holder of the debt instrument.
There are several data collection methods to esti-
mate those tradable debt instruments owned by resi-
dents and non-residents; these will depend on the
country’s market structure and practices. Usually,
data will be compiled from different sources: the is-
suers, the holders, financial market operators, custo-
dians, registers and other statistical sources.
Data collection often requires institutional arrange-
ments with different agencies. For example, the debt
management office will rely on the public sector debt
data collected by the central bank or statistical office
which may have the legal authority to collect data
from holders and the appropriate infrastructure or
expertise to carry out surveys.
For international (multilateral) organizations, you
must specify “International Organization” in the Insti-
tution Country field for their proper classification.
© DMFAS Programme, 2017
Clipart credit: PRESENTERMEDIA