Sovereign debt defaults: Evidence from developing countries
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This study investigates the determinants of sovereign default risk in 123 developing countries over the period 1970-2012. Adopting an approach distinct from the literature, this paper employs a continuous measure of the accumulated arrears of interest payments and principal repayments on private and official external debt as a proxy for sovereign default. Apart from the importance of the current account balance, short-term debt, credit to the private sector, output, lending interest rate, and the exchange rate, empirical results show that the presence of the HIPC relief program is found to mask a portion of the true effects of the economic and political factors on debt arrears. In addition, in contrast to middle-income countries, political risk exhibits a negative impact on accumulated arrears in low-income countries. Arrears are found to be responsive to lending interest rate only in the middle-income and non- HIPC countries. Moreover, in the HIPC and low-income countries arrears are found to be more sensitive to volatility in the exchange rates. This study recommends that indebted countries: (1) stabilize their exchange rate, (2) rationally manage external debt, and (3) enhance transparency in governmental institutions.
Abstract
This study investigates the determinants of sovereign default risk in 123 developing countries over the period 1970-2012. Adopting an approach distinct from the literature, this paper employs a continuous measure of the accumulated arrears of interest payments and principal repayments on private and official external debt as a proxy for sovereign default. Apart from the importance of the current account balance, short-term debt, credit to the private sector, output, lending interest rate, and the exchange rate, empirical results show that the presence of the HIPC relief program is found to mask a portion of the true effects of the economic and political factors on debt arrears. In addition, in contrast to middle-income countries, political risk exhibits a negative impact on accumulated arrears in low-income countries. Arrears are found to be responsive to lending interest rate only in the middle-income and non- HIPC countries. Moreover, in the HIPC and low-income countries arrears are found to be more sensitive to volatility in the exchange rates. This study recommends that indebted countries: (1) stabilize their exchange rate, (2) rationally manage external debt, and (3) enhance transparency in governmental institutions.
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