Safe Debt and Uncertainty in Emerging Markets: An Application to South Africa

Magnus Saxegaard

No 2014/231, IMF Working Papers from International Monetary Fund

Abstract: This paper develops a methodology for estimating a safe public debt level that would allow countries to remain below a maximum sustainable debt limit, taking into account the impact of uncertainty. Our analysis implies that fiscal policy should target a debt level well below the debt ceiling to allow space to absorb shocks that are likely to hit the economy. To illustrate our findings we apply the methodology to estimate a safe debt level for South Africa. Our results suggest that South Africa’s debt ceiling is around 60 percent of GDP, although uncertainty is high. Simulations suggest targeting a debt-to-GDP ratio of 40 percent of GDP would allow South Africa to remain below this debt ceiling over the medium-term with a high degree of confidence.

Keywords: WP; financial crisis; debt benchmark; debt sustainability; discount rate; debt ceilings; South Africa; multiplier effect; government debt; debt tolerance; potential GDP; debt ratio; debt level; accumulation equation; debt obligation; debt forecast; debt maturity; debt rating; Debt limits; Fiscal stance; Africa; Global (search for similar items in EconPapers)
Pages: 27
Date: 2014-12-19
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Citations: View citations in EconPapers (7)

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