Safe Debt and Uncertainty in Emerging Markets: An Application to South Africa
IMF Working Papers, December 19, 2014
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- Safe Debt and Uncertainty in Emerging Markets: An Application to South Africa
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Bibliographic details
- Authors: Magnus Saxegaard
- Published: December 19, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498399432.001
Methodology
- Develops a methodology for estimating a safe public debt level that would allow countries to remain below a maximum sustainable debt limit, taking into account the impact of uncertainty.
- Uses simulations to assess the probability of remaining below the debt ceiling over the medium-term under uncertainty.
Key findings and projections
- The analysis implies that fiscal policy should target a debt level well below the debt ceiling to allow space to absorb shocks that are likely to hit the economy.
- South Africa’s estimated debt ceiling is around 60 percent of GDP.
- Uncertainty around the debt ceiling estimate is high.
- Simulations suggest targeting a debt-to-GDP ratio of 40 percent of GDP would allow South Africa to remain below this debt ceiling over the medium-term with a high degree of confidence.
Policy recommendations
- Fiscal authorities should set debt targets well below the estimated maximum sustainable debt limit to build buffer space for shocks.
- Use simulation-based analysis that explicitly incorporates uncertainty when setting medium-term debt targets.