Debt Dynamics in Emerging and Developing Economies: Is R-G a Red Herring?

Marialuz Moreno Badia, Juliana Gamboa-Arbelaez and Yuan Xiang

No 2021/229, IMF Working Papers from International Monetary Fund

Abstract: In the wake of the COVID-19 pandemic, debt levels in emerging and developing economies have surged raising concerns about fiscal sustainability. Historically, negative interest-growth differentials in these countries have played a debt-stabilizing role. But is this enough to prevent countries from falling into debt distress? Drawing from a sample of 150 emerging and developing economies going back to the 1970s, we find that interest-growth differentials have remained relatively low, dampening debt increases in the run up to a crisis. But in the face of persistent primary deficits, debt service tends to rise abruptly—particularly in emerging markets—and a fiscal crisis ensues. There is also evidence that a large part of the debt build-up around crises stems from valuation effects associated with external debt and the materialization of contingent liabilities. These findings underscore that, though not necessarily a red-herring, low interest-growth differentials cannot fully offset the deleterious effects of large fiscal deficits, forex exposures, or hidden debts.

Keywords: dampening debt; interest-growth differential; debt build-up; debt-stabilizing role; debt Decomposition; Debt sustainability analysis; Real interest rates; Contingent liabilities; Global (search for similar items in EconPapers)
Pages: 38
Date: 2021-09-07
New Economics Papers: this item is included in nep-cwa, nep-fdg and nep-opm
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