Constructing country-specific debt sustainability indices for developing countries

Akeem Rahaman*, Scott Mark Romeo Mahadeo

*Corresponding author for this work

Research output: Working paper

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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.
Original languageEnglish
PublisherUniversity of Portsmouth
Number of pages39
Publication statusPublished - 11 Jan 2024

Publication series

NameWorking Papers in Economics and Finance

Keywords

  • debt sustainability
  • fiscal stress
  • index
  • principal component analysis
  • public debt

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