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Ms. Marialuz Moreno Badia, Juliana Gamboa-Arbelaez, and Yuan Xiang
In the wake of the COVID-19 pandemic, debt levels in emerging and developing economies have surged raising concerns about fiscal sustainability. Historically, negative interest-growth differentials in these countries have played a debt-stabilizing role. But is this enough to prevent countries from falling into debt distress? Drawing from a sample of 150 emerging and developing economies going back to the 1970s, we find that interest-growth differentials have remained relatively low, dampening debt increases in the run up to a crisis. But in the face of persistent primary deficits, debt service tends to rise abruptly—particularly in emerging markets—and a fiscal crisis ensues. There is also evidence that a large part of the debt build-up around crises stems from valuation effects associated with external debt and the materialization of contingent liabilities. These findings underscore that, though not necessarily a red-herring, low interest-growth differentials cannot fully offset the deleterious effects of large fiscal deficits, forex exposures, or hidden debts.
Ms. Marialuz Moreno Badia, Juliana Gamboa-Arbelaez, and Yuan Xiang

REFERENCES APPENDIX. DATA: DEFINITIONS AND SOURCES FIGURES 1. Debt and Interest Expense in Emerging and Developing Economies 2. Interest-Growth Differentials in Emerging and Developing Economies 3. Share of Countries with Negative Interest-Growth Differentials 4. Persistence and Volatility of Interest-Growth Differentials 5. Real Interest Rates in Emerging and Developing Economies 6. Real Growth in Emerging and Developing Economies 7. Financial Openness in Emerging and Developing Economies 8. Debt Decomposition in Emerging and Developing Economies 9

Luc Eyraud and Mr. Tao Wu

: Share of Non-Compliers Boxes 1. The Bottom-Up Approach To Estimating Discretionary Revenues 2. Is There a Trade-Off Between Fiscal Consolidation and Structural Reforms? 3. How Do Federations Constrain the Fiscal Policy of Sub-central Governments? 4. How To Move Forward with the Structural Balance Indicator? Appendices 1. Debt Decomposition Methodology 2. Procylicality of Fiscal Policy in the Euro Area References

International Monetary Fund

Competitors of the Tourism Sector D. Conclusions IV. Eastern Caribbean Tourism: Developments and Outlook A. Introduction B. Recent Tourism Developments C. Caribbean Tourism: Trends in Competitiveness D. Policy Implications and Conclusions V. Public Debt Accumulation in the ECCU A. Introduction B. Decomposing Public Sector Debt Dynamics C. Results of Debt Decomposition D. Worsening of the Fiscal Accounts: Why? E. Conclusions VI. The Role of the Banking Sector in the ECCU A. Introduction B. Banking Sector Links to the Real

International Monetary Fund

, 2000-05 Moodys Sovereign Credit Ratings, 1998-05 Annexes I. The Role of the Fund II. Outcomes of Recent Restructurings III. Debt Decompositions in the Post-Restructuring Phases IV. Public Debt Ratios and Probabilities of Debt Crisis Annex Tables I.1. Fund Arrangements During Recent Sovereign Debt Restructuring Episodes III.1. Evolution of Debt/GDP Ratios Since the Crises IV.1. Probit Estimation of Crisis Probability IV.2. Polynomial Fit Through In-Sample Forecasts Annex Figures III.1. Change in Debt/GDP Ratios, Post-Restructuring Period

International Monetary Fund

. Public Debt in ECCU Countries A. Introduction B. Overview of Public Debt in ECCU C. What Contributed to the Debt Accumulation? D. How was the High Debt Sustained? E. Conclusion Appendix Table 1 ECCU: Total Public Sector Debt Accumulation by Components Appendix Figure 1 Debt Decomposition References III. Rationalizing Public Expenditure in the ECCU A. Introduction B. Evolution of Public Finances C. Government Compensation and Employment D. Social Security E. Health F. Education G. Social Assistance H. Parastatal Entities I

International Monetary Fund