Empirical analysis of asymmetry phenomenon in the public debt structure of Sub-Saharan Africa's five biggest economies: A Markov-Switching model

Abstract

This study examined the sustainability of the future path of public debts in sub-Saharan Africa's five biggest economies.In light of the COVID 19 outbreak, the study adopts the Markov-switching model (MSM) to analyse the un(sustainability) of public debt in sub-Saharan Africa's five biggest economies (namely Nigeria, South Africa, Angola, Ghana and Ethiopia). The MSM approach is motivated by the idea that a country might be solvent in the short term but may face fiscal shocks which may violate sustainability in future. More importantly, the Markov-switching model provides us with the unusual advantage of estimating precise answers as to the probabilities of a regime switch as well as the time they would occur.Using the log-likelihood and information criteria, the result supports a two-state regime for all the 5 countries selected in this study. State 1 is the low-debt ratio state (sustainable debt) with a standard deviation lower than state 2, while the high-debt ratio state (unsustainable debt) is the regime with the higher standard deviation (State 2). The result also indicates that the probability of transitioning between both regimes are highly persistent. One economic implication of the forecast result is that future public debt levels in sub-Saharan African countries might not aid Africa Union's 2063 development targets.