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Title: Debt%20Sustainability%20and%20Debt%20Composition

Debt Sustainability and Debt Composition
  • UNCTAD Paper by
  • Heiner Flassbeck and Ugo Panizza

  • Problems with DSA exercises
  • Often mix the concept of external sustainability
    with that of fiscal sustainability
  • Trend to focus on the level of debt without
    considering its composition

  • Disentangling Concepts of Sustainability
  • External Sustainability and Fiscal Sustainability
  • Interactions/Linkages
  • Debt Decomposition analysis
  • Debt composition
  • Proposed composite debt indicator
  • Determinants of debt crises

Different concepts of sustainability tied to
different types of debt
  • External sustainability focuses upon the Transfer
  • ability to generate foreign exchange
  • Fiscal sustainability focuses upon the Budgetary
  • ability to increase or broaden the tax base to
    generate revenue

External Debt Indicators
  • Standard external debt sustainability indicators
  • Debt to GDP ratio
  • Debt to revenues ratio
  • Debt to export ratio
  • Weaknesses of these indicators
  • These indicators are problematic if import growth
    outpaces export growth.
  • Unless the external debt is issued in domestic
    currency, the foreign exchange needed will only
    result from a current account surplus.
  • Not all types of debt carry the same risk

Fiscal Sustainability Budgetary Problem
  • Public debt has an external and domestic
  • Fiscal sustainability analyses focus on
    adjustments to the level and composition of tax
    revenue or primary expenditures
  • Both public debt (domestic vs. external) and
    fiscal sustainability lack clear definitions
  • Formal fiscal sustainability tests are
    problematic and are demanding in terms of data.
  • The tests do not establish any necessary
    conditions for long-run sustainability

Fiscal Sustainability Indicators

  • Common Rule of Thumb ?d (r g) d ps,
  • d is the debt to GDP ratio
  • r is the steady state real interest rate
  • g is the long run growth rate of real GDP
  • ps is the primary surplus to GDP
  • Problems
  • No well specified definition of sustainability or
    of the necessary conditions for LR sustainability
  • Requires many assumptions on growth, interest
    rates, government expenditures and revenues
  • These variables tend to be endogenous and
    correlated with one another

Considerations for Developing Countries
  • Fiscal sustainability indicator does not account
    for the fact that developing countries often
  • Have a limited capacity to raise taxes
  • Have a volatile revenue base
  • Are subject to large external shocks (real and
    financial) that increase the volatility of GDP
  • Have high levels of liability dollarization

Tradeoffs between External and Fiscal
  • Consider a real devaluation
  • Positively impacts external sustainability
    through increased export competitiveness and
    FOREX earnings
  • Negatively impacts fiscal sustainability if a
    large share of public debt is denominated in
    foreign currency, results in a jump in the
    debt-to-GDP ratio.

  • These interactions highlight the need for
    domestic debt to be included in DSA exercises.
  • Broad shift towards a greater proportion of
    domestic debt in developing countries
  • Domestic debt has been excluded from DSA
    exercises thus far because
  • Domestic debt has different risk characteristics
  • Not appropriate to sum debt of different risk
    characteristics together
  • Data are scarce

Important Considerations
  • Any attempt of measuring debt sustainability
    requires a thorough analysis of the causes of
  • Analysis purely based on debt levels and on the
    forecast of some macroeconomic variables will
    lead to nowhere.

In a perfect world
  • Construct a composite debt indicator
  • Decompose external and public debt by
  • Maturity and currency characteristics
  • Type of lender
  • Type of borrower
  • Authors propose categorization of external debt
    across 12 different levels of risk.
  • Assigning different weights to different risk
    categories to calculate a composite risk measure

Back to reality empirical study
  • Empirical study examines how debt level and
    composition affect the probability of a debt
  • Estimate a probit model on an unbalanced panel of
    78 developing countries for the 1980-2006 period
  • Explanatory variables GDP growth international
    reserves to GDP, trade openness undervaluation
    of the exchange rate growth rate of private
    credit fiscal and CA balance inflation

  • Total external debt is decomposed into four
  • Total short term external debt
  • Long-term private external debt
  • Long-term public external debt to private
  • Long-term public debt to official creditors
    (bilateral and multilateral)

Empirical findings
  • Examining separate components of total external
    debt, authors find evidence that debt composition
  • Find significant evidence that crises are
    positively correlated with long term public debt
    owed to private creditors
  • Find evidence suggesting that the relationship
    between default risk and debt with private
    creditors is more sensitive to external shocks
    than between default risk and debt with official
  • Find evidence that there is less risk associated
    with borrowing abroad in their own currency.

  • Different types of debt may be ranked by risk
  • External public debt with private creditors in a
    foreign currency (highest risk)
  • Domestic public debt
  • External public debt with official creditors
    (lowest risk)
  • The evidence wrt private debt does not yield
    consistent evidence

Remaining Obstacles
  • Data availability
  • International agreement to provide better and
    comparable data on debt statistics

Thank You