Public Debt, Fiscal Solvency and Macroeconomic Uncertainty in Latin America: The Cases of Brazil, Colombia, Costa Rica, and Mexico
51 Pages Posted: 23 Aug 2004 Last revised: 27 Jul 2022
Date Written: July 2004
Abstract
Ratios of public debt as a share of GDP in Brazil, Colombia, and Mexico were 10 percentage points higher on average during 1996-2002 than in the period 1990-1995. Costa Rica's debt ratio remained stable but at a high level near 50 percent. Is there reason to be concerned for the solvency of the public sector in these economies? We provide an answer to this question based on the quantitative predictions of a variant of the framework proposed by Mendoza and Oviedo (2004). This methodology yields forward-looking estimates of debt ratios consistent with fiscal solvency for a government that faces revenue uncertainty and can issue only non-state-contingent debt. In this environment, aversion to a collapse in outlays leads the government to respect a "natural debt limit" equal to the annuity value of the primary balance in a "fiscal crisis". A fiscl crisis occurs after a long sequence of adverse revenue shocks and public outlays adjust to a tolerable minimum. The debt limit also represents a credible commitment to be able to repay even in a fiscal crisis but is not, in general, the same as the sustainable debt, which is driven by the probabilistic dynamics of the primary balance. The results of a baseline scenario question the sustainability of current debt ratios in Brazil and Colombia, while those in Costa Rica and Mexico seem inside the limits consistent with fiscal solvency. In contrast, public debt ratios are found to be unsustainable in all four countries for plausible changes to lower average growth rates or higher real interest rates. Moreover, sustainable debt ratios fall sharply when default risk is taken into account.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
By Oya Celasun, Xavier Debrun, ...
-
Assessing Fiscal Sustainability Under Uncertainty
By Theodore Barnhill and George Kopits
-
Assessing Debt Sustainability in Emerging Market Economies Using Stochastic Simulation Methods
By Doug Hostland and Philippe D. Karam
-
Assessing Debt Sustainability in Emerging Market Economies Using Stochastic Simulation Methods
By Doug Hostland and Philippe D. Karam
-
Capital Flows, Capital Controls and Currency Crisis: The Case of Brazil in the Nineties
-
How is the Debt Managed? Learning from Fiscal Stabilizations
By Alessandro Missale, Francesco Giavazzi, ...
-
The Perils of Tax Smoothing: Sustainable Fiscal Policy with Random Shocks to Permanent Output
By Evan Tanner and Kevin Carey