Developing Countries’ Vulnerability to Debt Crisis; a Multi-County Empirical Analysis of Shocks

This paper proposes the use of a more realistic alternative for estimating debt sustainability so that the continuum nature of the debt ratio is accommodated. Using the data for Latin America and Caribbean (LAC) and Sub Saharan African (SSA) countries, the study measures the degree of these countries' debt sustainability as a Debt Sustainability Indicator. The paper also considers macroeconomic factors that are generally attributed to the 1980s debt crisis and investigates the extent to which these factors can explain the persistent of shocks in our cross-country analysis of Third World Debt. The results indicate that the debt of these countries is indeed unsustainable. Furthermore, the findings support the conception that interest rate, oil price and non-oil exporting commodity prices shocks have contributed to the 1980s debt crises. However, contrary to the common belief, the contribution of these shocks is relatively small compared to other unidentified factors, indicating that one must consider factors beyond these shocks in order to understand the causes of the crisis. The later findings also imply that debt of LAC and SSA is unsustainable even when we accommodate for the macroeconomic factors, such as oil price that have permanent effect on debt-to-GDP ratio