Debt and Credit Quality in Central America, Panama, and the Dominican Republic

Guillermo LaGarda, Jordi Prat, Marco Solera and Javier Beverinotti

MPRA Paper from University Library of Munich, Germany

Abstract: Credit quality has long been associated with the level of indebtedness. But the sole fact that there are countries with high creditworthiness and large stocks of debt suggests that indebtedness is just one of many factors which determine credit quality. In this paper we investigate the role that economic fundamentals have on risk perception of public debt, through both direct and indirect effects. Countries are grouped into four clusters, each corresponding to a different stage of development in their economic fundamentals. We find that the effect of the debt burden on credit quality is conditional on the current level of economic fundamentals and the degree to which they are improving. A transition to stronger fundamentals would require moving to a better cluster but would ease pressure on any debt adjustment necessary to improve creditworthiness. Consequently, there are two types of approaches countries in CAPDR could focus on to improve credit quality. On the one hand, there are a set of actions which could be carried out in the short run to move within a particular group or cluster-fiscal toolkit. On the other hand, there are actions, which in the medium term may enable a country to transition to a group with better credit perception -structural changes.

Keywords: Debt; Credit Quality; Structural Reforms; Institutions; Macroeconomic Stability; Fiscal Deficit (search for similar items in EconPapers)
JEL-codes: E44 E61 E62 H3 H30 H6 H60 (search for similar items in EconPapers)
Date: 2016-07-26
New Economics Papers: this item is included in nep-mac
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