Abstract
Contingent claims analysis applied to Indonesia, Malaysia, the Philippines, the Republic of Korea, and Thailand shows no particular vulnerability to sovereign debt distress during recent years. However, the highly volatile “distance to distress” measure suggests that any of these countries may fall victim to a sudden loss in market confidence. For example, the value of Indonesia’s sovereign assets dropped to just two standard deviations above its repayment obligations during the 2013 United States Federal Reserve taper tantrum, causing capital outflows and currency depreciation. Generally, we find that contingent claims analysis and market-based risk measures well complement conventional debt sustainability analysis for Asia.
Highlights
This paper applies contingent claims analysis (CCA) to assess public debt sustainability of five Asian economies: Indonesia, Malaysia, the Philippines, the Republic of Korea, and Thailand.1 It forms part of an ADB research project exploring risk-adjusted public debt sustainability analysis (DSA) for Asian economies
We find that none of them would appear to be vulnerable to sovereign debt distress, not in normal times and not when facing the less favorable macroeconomic scenarios considered
CDS spreads and distance to distress are highly volatile throughout the period of observation and none of the countries considered is immune to sudden drops in market perception of risk as reflected in higher CDS spreads and eroding assets value
Summary
This paper applies contingent claims analysis (CCA) to assess public debt sustainability of five Asian economies: Indonesia, Malaysia, the Philippines, the Republic of Korea, and Thailand. It forms part of an ADB research project exploring risk-adjusted public debt sustainability analysis (DSA) for Asian economies. Related project papers provided standard DSA and fan-chart debt ratio projections for Asian countries (Ferrarini and Ramayandi 2015) and reviewed risk-based fiscal analysis methods in the Asian context (Kopits, Ferrarini, and Ramayandi 2016). These papers confirmed the validity of standard public DSA as an assessment tool. CCA’s focus on the market valuation of sovereign liabilities rather than assets, which are less observable and more difficult to value, circumvents the heavy data requirements of VaR This makes CCA more readily applicable to the context of developing Asia and of emerging economies more broadly (Kopits, Ferrarini, and Ramayandi 2016).. For a more thorough discussion of CCA and macrofinancial risk analysis, the reader is referred to Gray and Malone (2008) and related publications listed in the references section
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