IMF Working Papers

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

Author/Editor:

Marialuz Moreno Badia ; Juliana Gamboa-Arbelaez ; Yuan Xiang

Publication Date:

September 7, 2021

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

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.

Series:

Working Paper No. 2021/229

Subject:

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

Frequency:

regular