Safe Debt and Uncertainty in Emerging Markets: An Application to South Africa
28 Pages Posted: 6 Feb 2015
Date Written: December 2014
This paper 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. Our 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. To illustrate our findings we apply the methodology to estimate a safe debt level for South Africa. Our results suggest that South Africa’s debt ceiling is around 60 percent of GDP, although uncertainty 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.
Keywords: Public debt, South Africa, Debt ceilings, Fiscal policy, Debt sustainability, Emerging markets, Vector autoregression, Econometric models, government debt, debt level, level of debt, monetary fund, institutional investor, repayment, expenditure, deficits, government deficits, repayment capacity, macroeconomic volatility, revenue, financial crisis, debt levels, investment projects, budget deficit, market economies, interest rates, fiscal policies, currency, liquid bond market, treasury, output loss, maturity, debt maturity, good, finance, public investment, emerging market economies, national treasury, fiscal effort, macroeconomic environment, borrowing requirement, debt burden, sovereign rat
Suggested Citation: Suggested Citation