Debt Dynamics in Emerging and Developing Economies: Is R-G a Red Herring?

By Marialuz Moreno Badia, Juliana Gamboa-Arbelaez, Yuan Xiang

September 7, 2021

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Marialuz Moreno Badia, Juliana Gamboa-Arbelaez, and Yuan Xiang. Debt Dynamics in Emerging and Developing Economies: Is R-G a Red Herring?, (USA: International Monetary Fund, 2021) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

In the wake of the COVID-19 pandemic, debt levels in emerging and developing economies have surged raising concerns about fiscal sustainability. Historically, negative interest-growth differentials in these countries have played a debt-stabilizing role. But is this enough to prevent countries from falling into debt distress? Drawing from a sample of 150 emerging and developing economies going back to the 1970s, we find that interest-growth differentials have remained relatively low, dampening debt increases in the run up to a crisis. But in the face of persistent primary deficits, debt service tends to rise abruptly—particularly in emerging markets—and a fiscal crisis ensues. There is also evidence that a large part of the debt build-up around crises stems from valuation effects associated with external debt and the materialization of contingent liabilities. These findings underscore that, though not necessarily a red-herring, low interest-growth differentials cannot fully offset the deleterious effects of large fiscal deficits, forex exposures, or hidden debts.

Subject: Contingent liabilities, Debt sustainability analysis, External debt, Financial services, Public debt, Public financial management (PFM), Real interest rates

Keywords: Contingent liabilities, Dampening debt, Debt build-up, Debt Decomposition, Debt sustainability analysis, Debt-stabilizing role, Global, Interest-growth differential, Real interest rates

Publication Details

Pages:

38
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/229
Stock No:

WPIEA2021229
ISBN:

9781513596259
ISSN:

1018-5941

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