Constructing country-specific debt sustainability indices for developing countries

Akeem Rahaman and Scott Mahadeo
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Akeem Rahaman: University of Portsmouth

No 2024-01, Working Papers in Economics & Finance from University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group

Abstract: Contemporary crises continue to keep governments in protracted periods of borrowing, increasing the stock and flow of sovereign indebtedness. Single metrics of public debt – such as the debt-to-GDP ratio – provide an incomplete profile of a nation’s debt position, which is largely determined by country-specific factors. We consolidate various indicators of public debt to construct a novel debt sustainability index and its companion debt volatility index. We demonstrate our approach, based on principal component analysis, using a natural resource-rich but relatively data-poor country – Trinidad and Tobago – where debt management is a recurring macroeconomic concern, but comprehensive debt indices remain unavailable. The movements in our indices align with historical episodes that would influence country-specific public debt levels. Our approach is straightforward to adapt and apply to developing countries, where a uniform measure of debt is either unavailable or provide an incomplete perspective of fiscal stress when such a measure exists. We further illustrate the usefulness of the constructed indices by investigating the debt- growth nexus. Consistent with economic theory of countries with relatively lower debt levels, our novel debt indices for this country provide evidence of a positive, significant, and robust impact of debt on growth when the traditional debt-to-GDP measure suggests none.

Keywords: Debt Sustainability; Fiscal Stress Index; Principal Component Analysis; Public Debt (search for similar items in EconPapers)
JEL-codes: C38 C43 H63 (search for similar items in EconPapers)
Pages: 39
Date: 2024-01-10
New Economics Papers: this item is included in nep-dev and nep-fdg
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