Government Financial Assets and Debt Sustainability

IMF Working Papers, July 25, 2017

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Government Financial Assets and Debt Sustainability

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Bibliographic details

• Authors: Camila Henao Arbelaez, Nelson Sobrinho
• Published: July 25, 2017
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484311059.001

Research question and dataset

• Research question: Do government financial assets help improve public debt sustainability?
• Dataset: comprehensive dataset on government assets assembled from multiple sources covering 110 advanced and emerging market economies since the late 1980s.
• Time span: since the late 1980s.

Method and analytical focus

• Estimation target: impact of government financial assets on two key dimensions of debt sustainability:
  • borrowing costs (sovereign spreads)
  • probability of debt distress (debt crises)
• Empirical emphasis on variation by asset characteristics, notably liquidity.

Key findings

• Government financial assets significantly reduce sovereign spreads in emerging economies.
• Government financial assets significantly reduce the probability of debt crises in emerging economies.
• No significant reduction in sovereign spreads or probability of debt crises is found for advanced economies.
• The effect of government financial assets varies with asset characteristics, notably liquidity.
• Government financial assets help discriminate countries across the distribution of sovereign spreads, signaling information about emerging economies’ creditworthiness.

Policy implications and interpretation

• Government financial assets can serve as a buffer that lowers borrowing costs and distress probabilities for emerging economies, conditional on asset characteristics and liquidity.
• For advanced economies, the presence of government financial assets does not exhibit the same stabilizing effect on spreads or crisis probability, suggesting different transmission mechanisms or already priced-in asset profiles.
• Asset composition and liquidity should be considered when assessing the contribution of government financial assets to sovereign risk profiles.

Content in this bundle

• Government Financial Assets and Debt Sustainability, WP/17/173, July 2017
  • Government Financial Assets and Debt Sustainability, WP/17/173, July 2017 (Markdown version)
  • Government Financial Assets and Debt Sustainability, WP/17/173, July 2017 (PDF)