Abstract
Abstract This study develops an early warning signal (EWS) of government debt crisis using a panel data consisting of 43 developing countries over the period of 1960 to 2017. It employs two different methods: the noise to signal ratio to capture the signaling power of individual indicators; and the binomial logistic regression to construct a more general model. The binomial logistic regression offers a better predictive power relative to the noise to signal ratio. The binomial logistic regression can predict 61.5% of the government debt crisis 2 years in advance. An increase in inflation, government and private debt exposures, external debt to exports, ratio of short-term external debt to foreign exchange reserves, and the ratio of external interest payments to gross national income can signal an upcoming debt crisis. Similarly, a continuous decline in the gross domestic product (GDP) and government consumption also increase the likelihood of government debt crisis.
Highlights
This paper develops an early warning signal (EWS) of government debt crisis for developing countries
This study develops an early warning signal (EWS) of government debt crisis using a panel data consisting of 43 developing countries over the period of 1960 to 2017
The indicators that show a good performance are: (i) the ratio of foreign debt to gross national income, which has the highest predictive power of 72.7% with a quite low noise of 9%; (ii) the ratio of interest payments on foreign debt to gross national income, which has 61% predictive power and 15% noise; (iii) and the exchange rate, which is able to predict more than 60% of the crisis with 16% noise
Summary
This paper develops an EWS of government debt crisis for developing countries. Studies define government debt crisis in different ways.. Cerovic, Gerling, Hodge, and Medas (2018) define debt crisis as a condition in which government faces a distress in their balance sheet, resulting from imbalances in inflow and outflow. Daniel and Shiamptanis (2018) contend that debt crisis refers as the period in which the government debt repayment requires larger current and expected future values for the primary surplus. S&P’s defines government debt crisis as a situation whereby: (i) the government does not meet scheduled debt service on the due date or (ii) creditors are offered either a rescheduling (bank debt) or a debt exchange (bond debt) in less favorable terms than the original issue
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