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This paper was prepared with extension inputs from Ian Stuart at the South African National Treasury. We thank Anne-Marie Gulde-Wolf, Laura Papi, Matthew Simmonds, and Michael Sachs for helpful comments and suggestions.
As the recent debate surrounding the findings of Reinhart and Rogoff (2010) shows, the claim that debt beyond a common threshold level results in lower growth is much more contentious (see e.g., Herndon, Ash, and Pollin, 2013; and Eberhardt and Presbitero, 2013).
The IIR, which is published biannually by the Institution Investor magazine, is based on economists and sovereign risk analysts’ perception of a country’s default risk. The IIR grades each country on a scale from 0 to 100, with a rating a 100 given to countries perceived as having the lowest default risk.
See Burger et al. (2011) for a historical overview of South Africa’s fiscal position and public debt, as well as the policies underlying those developments.
It is worth emphasizing that recent budget documents have repeatedly stated that revenue and expenditure plans would be reassessed if the fiscal or economic outlook continued to deteriorate.
In this paper, the peer emerging market group of countries consists of Argentina, Brazil, Chile, China, Colombia, Hungary, India, Indonesia, Korea, Malaysia, Peru, the Philippines, Poland, Romania, Russia, Thailand, Turkey, and Ukraine.
The gross financing requirement is defined as the sum of the budget deficit plus debt amortization.
South Africa’s primary balance has averaged close to 0.6 percent since 1980.
The sample size in the three specifications that include a measure of a country’s default history is limited to the number of MAC DSA countries including in Reinhart’s debt history database.
The chart does not control for any discretionary change in the fiscal stance that could introduce additional volatility into the projections.
Note that the volatility of the primary balance and debt forecasts did decline significantly in 2012/13.
For the purpose of this analysis we assume a real interest rate of 2¼ percent, CPI inflation of 5 percent, and GDP inflation of 6.5 percent.
See Buffie et al. (2012) for an example of a modeling framework which analyses the impact of growth-enhancing public investment surges on debt sustainability, and Mabugu et al. (2013) for an analysis of the impact of public investment on potential growth and public debt.
The simulations assume that growth increases in line with potential growth so that the path of the output gap is unchanged relative to the baseline.