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Debt Dynamics in Emerging and Developing Economies: Is R-G a Red Herring?
Author:
Ms. Marialuz Moreno Badia
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,
Juliana Gamboa-Arbelaeznull

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Yuan Xiangnull

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Series:
IMF Working Papers
Volume/Issue:
Volume 2021: Issue 229
Language:
English
Publication Date:
07 Sep 2021
DOI:
https://doi.org/10.5089/9781513596259.001
ISBN:
9781513596259
ISSN:
1018-5941
Pages:
38
Keywords:
dampening debt; interest-growth differential; debt build-up; debt-stabilizing role; debt Decomposition; Debt sustainability analysis; Real interest rates; Contingent liabilities; Global
Legal-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.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2021: Issue 229