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

  • Marialuz Moreno Badia , Juliana Gamboa Arbelaez and Yuan Xiang
Published/Copyright: December 5, 2022
Journal of Globalization and Development
From the journal Journal of Globalization and Development Volume 13 Issue 2

Abstract

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.

Keywords: debt; interest-growth differential; crisis; fiscal sustainability
Corresponding author: Marialuz Moreno Badia, International Monetary Fund, 700 19th St NW, Washington, DC 20431, USA, E-mail:

Acknowledgments

The views expressed are those of the authors and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. We gratefully acknowledge helpful suggestions by Santiago Acosta-Ormaechea, Zamid Aligishiev, Tamon Asonuma, Bas Bakker, Khalid Elfayoumi, Dennis Essers, Maximilien Kaffo, Samba Mbaye, Giovanni Melina, Ugo Panizza, Andrea Presbitero, Rossen Rozenov, Charles Wyplosz, participants of the May 2021 Workshop on Sovereign Debt and Development, IMF colleagues and an anonymous referee.

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Received: 2021-07-01
Accepted: 2022-07-27
Published Online: 2022-12-05

© 2022 Walter de Gruyter GmbH, Berlin/Boston

Articles in the same Issue

  1. Frontmatter
  2. Symposia_Articles
  3. Towards HIPC 2.0? Lessons from Past Debt Relief Initiatives for Addressing Current Debt Problems
  4. A Mountain of Debt: Navigating the Legacy of the Pandemic
  5. Policy Analysis
  6. Debt Dynamics in Emerging and Developing Economies: Is R − G a Red Herring?
  7. Symposia_Article
  8. The Political Economy of Bilateral Lending from Emerging Creditors
  9. Research Foundation
  10. The Odious Haitian Independence Debt
  11. Policy Analysis
  12. On the Potential of Sovereign State-Contingent Debt in Contributing to Better Public Debt Management and Enhancing Sustainability Outcomes
  13. Symposia_Article
  14. Overcoming Original Sin
  15. Symposium
  16. Sovereign Debt Restructuring: The Way Forward
https://doi.org/10.1515/jgd-2021-0050
Keywords for this article
debt; interest-growth differential; crisis; fiscal sustainability

Articles in the same Issue

  1. Frontmatter
  2. Symposia_Articles
  3. Towards HIPC 2.0? Lessons from Past Debt Relief Initiatives for Addressing Current Debt Problems
  4. A Mountain of Debt: Navigating the Legacy of the Pandemic
  5. Policy Analysis
  6. Debt Dynamics in Emerging and Developing Economies: Is R − G a Red Herring?
  7. Symposia_Article
  8. The Political Economy of Bilateral Lending from Emerging Creditors
  9. Research Foundation
  10. The Odious Haitian Independence Debt
  11. Policy Analysis
  12. On the Potential of Sovereign State-Contingent Debt in Contributing to Better Public Debt Management and Enhancing Sustainability Outcomes
  13. Symposia_Article
  14. Overcoming Original Sin
  15. Symposium
  16. Sovereign Debt Restructuring: The Way Forward
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