 The Sovereign Debt and Financial Sector Nexus in the Arab RegionAli Awdeh () MPRA Paper from University Library of Munich, Germany Abstract: The Arab region contains several countries that suffer high levels of indebtedness, resulting from decades of weak (if not failing) macroeconomic, fiscal, monetary and trade policies. This indebtedness was further exacerbated by political and security unrest, and lastly by the repercussions of Covid-19 crisis. By end 2019, i.e. before the eruption of Covid-19 pandemic, the government debt-to-GDP ratio reached 200 percent in Sudan, which ranked the country third globally in this indicator. Two other Arab countries recorded government debt-to-GDP ratio above 100 percent, namely Lebanon and Bahrain. Several other Arab countries also record considerably high debt ratios, in particular Yemen, Egypt, Jordan, Morocco, and Tunisia. Among other factors, the persistent budget deficit, which is determined by the fiscal policies, is in turn a major determinant of the mounting debt in the Arab region. This high indebtedness resulted in high debt service burden in the Arab countries, which is financed via increased borrowing, higher taxes, and leading to lower government spending, thus imposing liquidity challenges and limits fiscal space which could have otherwise been invested in essential public services, and in financing the Sustainable Development Goals in the Arab countries. Several Arab countries rely heavily on banks to meet their borrowing needs and banks across the Arab region invest considerably in the government securities and dedicate large sums of their resources to finance government budget. The end-2022 data show that approximately 10 percent of the consolidated assets of the Arab banking sector is invested in government debt. The fiscal policies in the Arab countries are indeed responsible for the level of debt held by banks. In particular, budget balance, government debt levels, and interest paid on government debt, are all factors that determine the investment of banks in the domestic sovereign debt. The interconnectedness between fiscal position and bank lending to the government results in the sovereign-bank nexus phenomenon in the Arab region, which poses risks for fiscal sustainability and financial stability. Moreover, the high levels of bank holdings of government debt in several Arab countries may result in two repercussions: firstly, a high exposure of banks to sovereign risk and ratings downgrade following sovereign downgrade; and secondly, a crowding out effects for private sector and depriving businesses from the needed funding. To avoid such scenarios, proper macroprudential and microprudential framework aiming to mitigate the sovereign-bank nexus must be put in place. Keywords: Sovereign Debt; Financial Sector Stability. (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:119425 Access Statistics for this paper More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC. |
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