Further results on countries’ debt-servicing performance: The relevance of structural factors

Abstract

debt-servicing capacity of borrowing countries has always been a subject of relevance to both borrowers and creditors, for obvious reasons. More recently, it has become a matter of broader concern related directly to the stability of the international financial system and to the survival of the existing world economic order. The classic source for a theoretical discussion on growth and debt is Avramovic et al [1964], which emphasizes the role of long-term issues of solvability and sustainability of debt-financed growth. In addition, the literature contains a number of quantitative studies which, following the lead of Frank and Cline [1971] and Feder and Just [1977], applied discriminant analysis or logit analysis to determine empirically those factors associated with inability to service the external debt. Those studies have been summarized by Aliber [1980]. More recent studies using the logit model are Feder et al [1981] and Schmidt [1984]. Saini and Bates [1984] provide an up-to-date survey of the literature on quantitative approaches to country risk analysis. The purpose of the present paper is to attempt to identify empirically the structural factors likely to affect the debt-servicing capacity of countries. A major difference between this study and the previous empirical work on debtservicing capacity is that it attempts to rely exclusively on structural, slow to change variables as explanatory variables. (The specific variables used here will be discussed later.) As a result, the model is meant to assess the structural strenghts or weaknesses of borrowing countries in terms of debt-servicing capacity. Rather than issuing warnings about the imminence of debt-service crises, the model will produce warnings about the vulnerability of countries to shocks (such as the downturn of the world business cycle, for example) which