Debt Dynamics in Emerging and Developing Economies: Is R-G a Red Herring?
IMF Working Papers, September 7, 2021
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- Debt Dynamics in Emerging and Developing Economies: Is R-G a Red Herring?
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Bibliographic details
- Authors: Marialuz Moreno Badia, Juliana Gamboa-Arbelaez, Yuan Xiang
- Published: September 7, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513596259.001
Summary
- Context: In the wake of the COVID-19 pandemic, debt levels in emerging and developing economies have surged, raising concerns about fiscal sustainability.
- Research scope: Sample of 150 emerging and developing economies going back to the 1970s.
- Central question: Have historically negative interest-growth differentials (r - g) been sufficient to prevent countries from falling into debt distress?
Key findings
- Interest-growth differentials have remained relatively low, dampening debt increases in the run up to a crisis.
- Persistent primary deficits lead to abrupt rises in debt service—particularly in emerging markets—followed by fiscal crises.
- A large part of the debt build-up around crises stems from valuation effects associated with external debt and the materialization of contingent liabilities.
- Conclusion: Low interest-growth differentials are not sufficient to fully offset the deleterious effects of large fiscal deficits, forex exposures, or hidden debts.
Mechanisms and drivers identified
- Debt-stabilizing role of negative interest-growth differentials observed historically.
- Valuation effects on external debt contribute materially to debt increases around crises.
- Contingent liabilities (hidden debts) materializing amplify debt buildups and fiscal stress.
- Forex exposures increase vulnerability despite favorable r - g dynamics.
Policy implications and priorities
- Do not rely solely on negative interest-growth differentials to ensure fiscal sustainability.
- Manage and reduce persistent primary deficits to prevent abrupt increases in debt service.
- Strengthen monitoring and disclosure of contingent liabilities to limit hidden-debt risks.
- Improve management of external debt and foreign-exchange exposures to mitigate valuation-driven debt buildups.
Publication and metadata
- Authors: Marialuz Moreno Badia, Juliana Gamboa-Arbelaez, Yuan Xiang
- Date: September 7, 2021
- Series: IMF Working Papers, Working Paper No. 2021/229
- Volume: 2021; Issue: 229; Pages: 38
- DOI: https://doi.org/10.5089/9781513596259.001
- Stock No: WPIEA2021229
- ISBN: 9781513596259
- ISSN: 1018-5941
Marialuz Moreno Badia, Juliana Gamboa-Arbelaez, and Yuan Xiang. "Debt Dynamics in Emerging and Developing Economies: Is R-G a Red Herring?", IMF Working Papers 2021, 229 (2021), accessed 9/16/2026, https://doi.org/10.5089/9781513596259.001
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- Working Paper