Pattern of public debt and debt overhang among BRICS nations: an empirical analysis

Justin Joy and Prasant Kumar Panda

Journal of Financial Economic Policy, 2019, vol. 12, issue 3, 345-363

Abstract: Purpose - This paper aims to analyze the pattern of public debt in Brazil, Russian Federation, India, China and South Africa (BRICS) in a comparative perspective. Besides, an attempt is made to verify the existence of debt overhang as suggested by Krugman (1988) among BRICS nations. Design/methodology/approach - Annual panel data for BRICS for the period 1980-2016 has been used for the analysis. Percentage ratio method has been used to analyze the pattern of debt. Panel covariate augmented Dickey–Fuller (pCADF) test has been used to verify the time series properties of the variable, while panel cointegration test of Pedroni (1999) is used to check the existence of any co-integrating vector among the variables. Panel Granger causality test is used to check the causality between the variables. Findings - Co-integration result suggests that there exists a strong long-run equilibrium relationship between debt service, domestic savings, capital formation and economic growth of BRICS nations. From Granger causality test, it is observed that domestic savings and capital formation are Granger caused by debt servicing. The coefficients from fully modified ordinary least squares measure a negative impact of debt service on gross capital formation and gross domestic saving. This suggests that the payment for debt service affects capital formation and gross domestic savings adversely. Thus, it gives primary signals for debt overhang effect in BRICS nations. Practical implications - Allowing debt service to negatively affect the investment and potential investment will result in slowdown or stagnation in economic growth in the long run, so strategies need to be taken in BRICS nations to check the adverse effects of rising level of debt-service-payment-to-gross national income ratio on domestic savings and capital formation. BRICS nations need to reduce their debt service payment by undertaking appropriate strategy of debt overhaul and fiscal management so that domestic savings and capital formation in the country will not be adversely affected. Besides, BRICS nations need to take measures to augment its domestic savings and capital formations. Originality/value - To the best of the authors’ knowledge, no published works have analyzed the pattern of public debt for BRICS (major developing nations). Debt servicing is also not checked for BRICS in recent papers, considering overhang approach.

Keywords: Debt; International lending and debt problems; Macroeconomic aspects of public finance; Models with panel data; Public debt; Economics growth; BRICS; Debt servicing; Debt overhang theory; Domestic savings; Capital formations; Effect of debt; Debt management; H63; H54; E21; E22; F39 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:jfep-01-2019-0021

DOI: 10.1108/JFEP-01-2019-0021

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