VI. Annexes Annex A
Anderson, T. W. and C. Hsiao (1981), Estimation of Dynamic Models with Error Components, Journal of the American Statistical Association, 76, 598-606.
Baek, In-Mee, A. Bandopadhyaya and Ch. Du (2005), “Determinants of market-assessed sovereign risk: Economic fundamentals or market appetite?”, Journal of International Money and Finance, 24, 533-548.
Cantor, R., and F. Packer (1996), “Determinants and impact of sovereign credit ratings”, Federal Reserve Bank of New York, Economic Policy Review 2(2), 37-53.
Eichengreen, B. Hausman, R. and U. Panizza (2003), “The Pain of Original Sin” in Eichengreen, B. and R. Hausman (eds.), Debt Denomination and Financial Instability in Emerging-Market Economies, Chicago: University Press (forthcoming).
Eichengreen, B. Hausman, R. and U. Panizza (2003a), “Currency Mismatches, Debt Intolerance and Original Sin: Why they are not the same and why it matters”, NBER working paper 10036.
Gill, I., T. Packard, and J. Yermo (2005) Keeping the Promise Of Social Security in Latin America, Washington DC, The World Bank, 341 p.
Gustman, A.L., T. L. Steinmeier (1998), Effects of Pensions on Savings: Analysis with data from the Health and Retirement Study, NBER Working Paper 6681.
Haque, N. Kumar, M., Mark, N., and D. Mathieson (1996), “The economic content of indicators of developing country creditworthiness”, IMF Staff Papers 43(4).
Holzman, R., Palacios, R. and Zviniene, A. (2004), “Implicit Pension Debt: Issues, Measurement and Scope in International perspective”, World Bank Social Protection Discussion Paper Series.
Kaufmann, Daniel Aart Kraay and Massimo Mastruzzi (2005). “Governance Matters IV: Governance Indicators for 1996-2004”. Draft, May 2005
Pinheiro, V. (2004), “The Political Economy of Pension Reform in Brazil: A Historical Perspective”, Inter-American Development Bank Working Paper.
Powell, A. and J. F. Martinez (2008), “On Emerging Economy Sovereign Spreads and Ratings”, IADB, Research Department, Working Paper No. 629.
Truglia, V. (2002), “Sovereign Ratings and Aging Societies”, Paper presented at Rosenberg Institute of Global Finance Conference on “Financing Global Aging”, October 2002 www.brandeis.edu/global/rosenberg_papers/truglia_paper.pdf
Tsibouris, George C., Horton, M., Flanagan, M. and W. Maliszewski (2006), “Experience with Large Fiscal Adjustments”, IMF Occasional Paper No. 246.
Zviniene, A. and T. Packard (2002), “A Simulation of Social Security Reforms in Latin America: What Has Been Gained”, Background Paper for Regional Study on Social Security Reform, The World Bank.
We acknowledge helpful comments and suggestions from seminar participants at the Economic Panel of the Fiscal Affairs Department of the International Monetary Fund (and in particular of Todd Groome), as well as from Manuel Arellano and Hugo Rodriguez Mendizabal. We also thank Noel Perez Benitez for excellent research assistance.
All from the International Monetary Fund
Banco de México.
Strictly speaking, making up for lost contribution revenue with financial borrowing is to replace a flow of new implicit financing with a flow of new explicit borrowing. Issuing “recognition bonds” to compensate workers for the loss of acquired rights, as has been done under some pension reforms, is closer to the idea of making the stock of IPD explicit, although it really involves putting a definitive value on IPD.
Pension obligations under a PAYGO defined-benefit system would be contingent on the life of the pensioneer who holds the claim, but also subject to discretionary changes in the parameters of the pension system itself.
However, economists have increasingly emphasized the need to include the concept of IPD in the standard set of debt sustainability indicators (see Holzman, Palacios and Zviniene, 2004).
In particular, Pinheiro (2004) argues that in the late nineties estimates of IPD for Brazil from various sources varied by as much as sixty percent of GDP.
General government debt is one key criterion for both Moody’s and Standard and Poor’s for assigning sovereign credit ratings, as stressed by Powell and Martinez (2008). Many other variables affect ratings—including the country’s default history, the external and fiscal stance and the perceived institutional and governability status—which explains why advanced countries such as Japan, Belgium, Italy, Portugal and Spain can be in the “AA” range despite their high debts. These countries can rollover debt with relative ease, and there is no question on their ability to pay.
The country credit ratings developed by the Institutional Investor (IIR) are based on information provided by senior economists and sovereign-risk analysts at leading global banks and money management and securities firms. Respondents grade each country in a scale of 0 to 100, where 100 represents the least chance of default.
As noted by Baek, et al. (2005), in the country risk literature, indicators of sovereign creditworthiness are usually represented by ratings of agencies and publications. For example, Jacque el al. (1996) also use the IIR and the Economic Intelligence Unit (EIU), while Cantor and Packer (1996) use Moody’s and S&P ratings.
The key difference in the series is that of coverage, with the Tsibouris et al. (2006) database including generally wider public sector debt in its series.
The political stability variable measures the likelihood of violence threats to, or changes in, government, including terrorism. The source is Kaufmann, Kraay and Mastruzzi (2005) and it is measured in units ranging from -2.5 to 2.5, with higher values corresponding to more stability.
The countries are Argentina, Bolivia, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Mexico, Peru, Poland, Uruguay, Iceland, Kazakhstan, Latvia, Russia, Slovakia, Estonia, Lithuania, Bulgaria and Croatia.
The exception is the medium-term dummy variable in the third specification, both when included alone and when interacted by the country’s relative size. This implies that the pension reform might improve the rating only after 4 years. However, the lack of significance of the long-term dummy variable could mean that benefit on country ratings again fade away 8 years after the reform.
The Arellano-Bond test confirms the existence of serial correlation of order one in our dataset.
The bottom of Table 3 displays the tests for serial correlation, and the number of observations and countries. The tests for serial correlation show that there is no serial correlation of order 1 and 2.
The current account balance and international reserves have unexpected signs, as they appear to raise the perception of default.
Furthermore, the relative size indicator could likely be picking up the impact of other structural issues (such as political stability and the “original sin” ranking) which were not available for the panel regressions under the indirect method.
Another possibility (see Gil, Packard and Yermo (2005), chapter 3) is that the negligible effect on Mexico’s country risk may reflect the country’s low IPDs by Latin American standards prior to the reform. However, even if relatively low by regional standards, IPD was high in absolute terms and the reform reduced it by a significant amount in a few years.
The concept of public debt used in the calculations shown in this section is the broadest one available for Mexico, the historical stock of the financial requirements of the public sector.
The IIR used in this exercise is the one officially released, rather than the transformed variable used in the regressions presented in the previous sections.
The effect of the counerfactual primary balance is not taken into account into the counterfactual ratings, since the estimated coefficient on the primary balance is not statistically significant.