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An Investigation of the Factors Influencing External Debt in Emerging Market Economies

Year 2023, Volume: 16 Issue: 2, 497 - 509, 31.12.2023

Ali İlhan

https://doi.org/10.37093/ijsi.1284735

Abstract

External financing support plays a vital role in the economic development of emerging market economies (EMEs). However, the ineffective using of external resources can increase the debt burden and exacerbate macroeconomic instability and financial vulnerabilities. After the global financial crisis, growing debt accumulation with the debt-favored environment has raised discussions about whether external financing is a blessing or a curse for macro-financial stability. This paper explores the drivers of external debt in EMEs from 2005Q1 to 2020Q1. To this end, the effects of economic growth, inflation, exchange rate, trade openness, and domestic credit on external debt to gross domestic product are analyzed with panel cointegration and panel augmented mean group (AMG) estimator for eight EMEs. The panel cointegration findings show that a long-run relationship exists between the series. The panel AMG findings indicate that economic growth declines external debt. A rise in trade openness, inflation, and domestic credit accumulate foreign debt in the long-run, whereas the impact of the credit is barely statistically significant. Although the impact of the exchange rate is insignificant for the panel, it is statistically significant in the four countries. Country-specific results are largely consistent with the panel findings, but some differences exist across countries.

Keywords

Emerging market economies external debt macroeconomic variables panel cointegration panel augmented mean group

Ethical Statement

The author declares that this article complies with ethical standards and rules.

Supporting Institution

No financial support was received from any person or institution for the study.

References

  • Abdullahi, M. M., Bakar, N. A. B. A., & Hassan, S. B. (2015). Determining the macroeconomic factors of external debt accumulation in Nigeria: An ARDL bound test approach, Procedia – Social and Behavioral Sciences, 211, 745–752. https://doi.org/10.1016/j.sbspro.2015.11.098
  • Adamu, I. M. (2019). Re-visiting the drivers for increasing external debt. Journal of Contemporary Issues and Thought, 9(2019), 40–53. https://doi.org/10.37134/jcit.vol9.5.2019
  • Al-Fawwaz, T. M. (2016). Determinants of external debt in Jordan: An empirical study (1990–2014). International Business Research, 9(7), 116–123. https://doi.org/10.5539/ibr.v9n7p116
  • Awan, R. U., Anjum, A., & Rahim, S. (2015). An econometric analysis of determinants of external debt in Pakistan. British Journal of Economics, Management & Trade, 5(4), 382–391. https://doi.org/10.9734/BJEMT/2015/8837
  • Beyene, S. D., & Kotosz, B. (2020). Macroeconomic determinants of external indebtedness of Ethiopia: ARDL approach to cointegration. Society and Economy, 42(3), 313–332. https://doi.org/10.1556/204.2020.00013
  • Bittencourt, M. (2015). Determinants of government and external debt: Evidence from the young democracies of South America. Emerging Markets Finance & Trade, 51(3), 463–472. https://doi.org/10.1080/1540496X.2015.1025667
  • Bortz, P., Michelena, G., & Toledo, F. (2022). The global financial cycle and external debt: effects on growth and distribution in emerging and developing economies. Journal of Post Keynesian Economics, 45(3), 476–502. https://doi.org/10.1080/01603477.2022.2068032
  • Breusch, T. S., & Pagan, A. R. (1980). The lagrange multiplier test and its applications to model specification in econometrics, The Review of Economic Studies, 47(1), 239–253. https://doi.org/10.2307/2297111
  • Cavallino, P., & Hofmann, B. (2022, July 18). Capital flows and monetary policy trade-offs in emerging market economies (BIS Working Papers, No. 1032). Bank for International Settlements. https://www.bis.org/publ/work1032.pdf
  • Colombo, E., & Longoni, E. (2009). The politics of external debt in developing countries (Department of Economics Working Paper Series, No. 176). University of Milan. http://repec.dems.unimib.it/repec/pdf/mibwpaper176.pdf
  • Czerkawski, C. (1991). Theoretical and policy-oriented aspects of the external debt economics. Springer-Verlag.
  • Dawood, M., Baidoo, S. T., & Shah, S. M. R. (2021). An empirical investigation into the determinants of external debt in Asian developing and transitioning economies. Development Studies Research, 8(1), 253–263. https://doi.org/10.1080/21665095.2021.1976658
  • Eberhardt, M. (2012). Estimating panel time-series models with heterogeneous slopes. The Stata Journal, 12(1), 61–71. https://doi.org/10.1177/1536867X1201200105
  • Eberhardt, M., & Bond, S. (2009, October 7). Cross-section dependence in nonstationary panel models: A novel estimator (MPRA Paper, No. 17692). Munich Personal RePEc Archive. https://mpra.ub.uni-muenchen.de/17692/1/MPRA_paper_17692.pdf
  • Eberhardt, M., & Teal, F. (2010, November). Productivity analysis in global manufacturing production (Department of Economics Discussion Paper Series, No. 515). University of Oxford. https://ora.ox.ac.uk/objects/uuid:f9d91b40-d8b7-402d-95eb-75a9cbdcd000
  • Elkhishin, S., & Mohieldin, M. (2021). External debt vulnerability in emerging markets and developing economies during the COVID-19 shock. Review of Economics and Political Science, 6(1), 24–47. https://doi.org/10.1108/REPS-10-2020-0155
  • Gokmenoglu, K., & Rafik, R. A. M. (2018). Determinants of external debt: The case of Malaysia. In N. Ozatac & K. K. Gokmenoglu (Eds.), Emerging Trends in Banking and Finance: 3rd International Conference on Banking and Finance Perspectives (pp. 16–33). Springer. https://doi.org/10.1007/978-3-030-01784-2
  • Greenidge, K., Drakes, L., & Craigwell, R. (2010). The external public debt in the Carribbean Community. Journal of Policy Modeling, 32(3), 418–431. https://doi.org/10.1016/j.jpolmod.2010.02.004
  • Gülcemal, T. (2022). External debt and economic growth in emerging economies: Panel causality analysis. Sosyoekonomi, 30(52), 27–36. https://doi.org/10.17233/sosyoekonomi.2022.02.02
  • Gylfason, T. (1991). Inflation, growth, and external debt: A view of the landscape. The World Economy, 14(3), 279–297. https://doi.org/10.1111/j.1467-9701.1991.tb00849.x
  • Koh, W. C., & Yu, S. (2021). Chapter 5: Macroeconomic and financial sector policies. In M. A. Kose & F. Ohnsorge (Eds.), A decade after the global recession: Lessons and challenges for emerging and developing economies (pp. 211–253). World Bank Publications.
  • Kose, M. A., & Ohnsorge, F. (2021). Chapter 1: A decade after the global recession: Lessons and challenges. In M. A. Kose & F. Ohnsorge (Eds.), A decade after the global recession: Lessons and challenges for emerging and developing economies (pp. 5–53). World Bank Publications.
  • Kose, M. A., Nagle, P., Ohnsorge, F., & Sugawara, N. (2021). Global waves of debt: Causes and consequences. World Bank Publications.
  • Kose, M. A., Ohnsorge, F., & Sugawara, N. (2020, February). Benefits and costs of debt: The dose makes the poison (World Bank Policy Research Working Paper, No. 9166). World Bank. https://doi.org/10.1596/1813-9450-9166
  • Mensah, D., Aboagye, A. Q. Q., Abor, J. Y., & Kyereboah-Coleman, A. (2017). External debt among HIPCs in Africa: accounting and panel VAR analysis of some determinants. Journal of Economic Studies, 44(3), 431–455. https://doi.org/10.1108/JES-05-2015-0080
  • Mijiyawa, A. G. (2022). External debt in developing countries since HIPC and MDRI: What are the driving factors? International Journal of Finance & Economics, 27(2), 1683–1699. https://doi.org/10.1002/ijfe.2236
  • Newey, W. K., & West, K. D. (1994). Automatic lag selection in covariance matrix estimation. The Review of Economic Studies, 61(4), 631–653. https://doi.org/10.2307/2297912
  • Onafowora, O., & Owoye, O. (2019). Impact of external debt shocks on economic growth in Nigeria: a SVAR analysis. Economic Change and Restructuring, 52, 157–179. https://doi.org/10.1007/s10644-017-9222-5
  • Özata, E. (2017). Determinants of external debt accumulation in Turkey: Evidence from an ARDL bound test approach. Journal of Business & Economic Policy, 4(4), 134–143. https://jbepnet.com/journals/Vol_4_No_4_December_2017/14.pdf
  • Pedroni, P. (2004). Panel cointegration: Asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econometric Theory, 20(3), 597–625. https://doi.org/10.1017/S0266466604203073
  • Persyn, D., & Westerlund, J. (2008). Error-correction-based cointegration tests for panel data. The Stata Journal, 8(2), 232–241. https://doi.org/10.1177/1536867X0800800205
  • Pesaran, M. H. (2004, August). General diagnostic tests for cross section dependence in panels (IZA Discussion Paper Series, No. 1240). The Institute for the Study of Labor [IZA]. https://docs.iza.org/dp1240.pdf
  • Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross-section dependence. Journal of Applied Econometrics, 22(2), 265–312. https://doi.org/10.1002/jae.951
  • Pesaran, M. H., & Smith, R. (1995). Estimating long-run relationship from dynamic heterogeneous panels. Journal of Econometrics, 68(1), 79–113. https://doi.org/10.1016/0304-4076(94)01644-F
  • Pesaran, M. H., & Yamagata, T. (2008). Testing slope homogeneity in large panels, Journal of Econometrics, 142(1), 50–93. https://doi.org/10.1016/j.jeconom.2007.05.010
  • Pesaran, M. H., Ullah, A., & Yamagata, T. (2008). A bias-adjusted LM test of error cross-section independence. The Econometrics Journal, 11(1), 105–127. https://doi.org/10.1111/j.1368-423X.2007.00227.x
  • Ramzan, M., & Ahmad, E. (2014). External debt growth nexus: Role of macroeconomic policies. Economic Modelling, 38, 204–210. http://dx.doi.org/10.1016/j.econmod.2013.12.014
  • Reinhart, C. M., & Trebesch, C. (2015). The pitfalls of external dependence: Greece, 1829–2015. Brookings Papers on Economic Activity, 2015(2), 307–328. https://doi.org/10.1353/eca.2015.0000
  • Sağdıç, E. N., & Yıldız, F. (2020). Factors affecting external debt in transition economies: The case of Central Asia and the Caucasus. Uluslararası Yönetim İktisat ve İşletme Dergisi, 16(4), 891–909. http://dx.doi.org/10.17130/ijmeb.853521
  • Tiruneh, M. W. (2004). An empirical investigation into the determinants of external indebtedness. Prague Economic Papers, 13(3), 261–277. https://doi.org/10.18267/j.pep.242
  • Verma, A. K., & Sengupta, R. (2021). Interlinkages between external debt financing, credit cycles and output fluctuations in emerging market economies, Review of World Economics, 157, 965–1001. https://doi.org/10.1007/s10290-021-00424-3
  • Waheed, A. (2017). Determinants of external debt: A panel data analysis for oil and gas exporting and importing countries. International Journal of Economic and Financial Issues, 7(1), 234–240. https://dergipark.org.tr/tr/download/article-file/364168
  • Westerlund, J. (2007). Testing for error correction in panel data. Oxford Bulletin of Economics and Statistics, 69(6), 709–748. https://doi.org/10.1111/j.1468-0084.2007.00477.x
  • World Bank. (2017, June). Global economic prospects: A fragile recovery (A World Bank Group Flagship Report). World Bank. https://doi.org/10.1596/978-1-4648-1024-4
  • World Bank. (2022). International debt statistics. World Bank Publications.
  • World Bank & International Monetary Fund [IMF]. (2022, April 01). Making debt work for development and macroeconomic stability (Document No. DC2022-0003). Development Committee. https://www.devcommittee.org/content/dam/sites/devcommittee/doc/documents/mgr/Final%20on%20Making%20Debt%20Work_DC2022-0003.pdf

Year 2023, Volume: 16 Issue: 2, 497 - 509, 31.12.2023

Ali İlhan

https://doi.org/10.37093/ijsi.1284735

Abstract

References

  • Abdullahi, M. M., Bakar, N. A. B. A., & Hassan, S. B. (2015). Determining the macroeconomic factors of external debt accumulation in Nigeria: An ARDL bound test approach, Procedia – Social and Behavioral Sciences, 211, 745–752. https://doi.org/10.1016/j.sbspro.2015.11.098
  • Adamu, I. M. (2019). Re-visiting the drivers for increasing external debt. Journal of Contemporary Issues and Thought, 9(2019), 40–53. https://doi.org/10.37134/jcit.vol9.5.2019
  • Al-Fawwaz, T. M. (2016). Determinants of external debt in Jordan: An empirical study (1990–2014). International Business Research, 9(7), 116–123. https://doi.org/10.5539/ibr.v9n7p116
  • Awan, R. U., Anjum, A., & Rahim, S. (2015). An econometric analysis of determinants of external debt in Pakistan. British Journal of Economics, Management & Trade, 5(4), 382–391. https://doi.org/10.9734/BJEMT/2015/8837
  • Beyene, S. D., & Kotosz, B. (2020). Macroeconomic determinants of external indebtedness of Ethiopia: ARDL approach to cointegration. Society and Economy, 42(3), 313–332. https://doi.org/10.1556/204.2020.00013
  • Bittencourt, M. (2015). Determinants of government and external debt: Evidence from the young democracies of South America. Emerging Markets Finance & Trade, 51(3), 463–472. https://doi.org/10.1080/1540496X.2015.1025667
  • Bortz, P., Michelena, G., & Toledo, F. (2022). The global financial cycle and external debt: effects on growth and distribution in emerging and developing economies. Journal of Post Keynesian Economics, 45(3), 476–502. https://doi.org/10.1080/01603477.2022.2068032
  • Breusch, T. S., & Pagan, A. R. (1980). The lagrange multiplier test and its applications to model specification in econometrics, The Review of Economic Studies, 47(1), 239–253. https://doi.org/10.2307/2297111
  • Cavallino, P., & Hofmann, B. (2022, July 18). Capital flows and monetary policy trade-offs in emerging market economies (BIS Working Papers, No. 1032). Bank for International Settlements. https://www.bis.org/publ/work1032.pdf
  • Colombo, E., & Longoni, E. (2009). The politics of external debt in developing countries (Department of Economics Working Paper Series, No. 176). University of Milan. http://repec.dems.unimib.it/repec/pdf/mibwpaper176.pdf
  • Czerkawski, C. (1991). Theoretical and policy-oriented aspects of the external debt economics. Springer-Verlag.
  • Dawood, M., Baidoo, S. T., & Shah, S. M. R. (2021). An empirical investigation into the determinants of external debt in Asian developing and transitioning economies. Development Studies Research, 8(1), 253–263. https://doi.org/10.1080/21665095.2021.1976658
  • Eberhardt, M. (2012). Estimating panel time-series models with heterogeneous slopes. The Stata Journal, 12(1), 61–71. https://doi.org/10.1177/1536867X1201200105
  • Eberhardt, M., & Bond, S. (2009, October 7). Cross-section dependence in nonstationary panel models: A novel estimator (MPRA Paper, No. 17692). Munich Personal RePEc Archive. https://mpra.ub.uni-muenchen.de/17692/1/MPRA_paper_17692.pdf
  • Eberhardt, M., & Teal, F. (2010, November). Productivity analysis in global manufacturing production (Department of Economics Discussion Paper Series, No. 515). University of Oxford. https://ora.ox.ac.uk/objects/uuid:f9d91b40-d8b7-402d-95eb-75a9cbdcd000
  • Elkhishin, S., & Mohieldin, M. (2021). External debt vulnerability in emerging markets and developing economies during the COVID-19 shock. Review of Economics and Political Science, 6(1), 24–47. https://doi.org/10.1108/REPS-10-2020-0155
  • Gokmenoglu, K., & Rafik, R. A. M. (2018). Determinants of external debt: The case of Malaysia. In N. Ozatac & K. K. Gokmenoglu (Eds.), Emerging Trends in Banking and Finance: 3rd International Conference on Banking and Finance Perspectives (pp. 16–33). Springer. https://doi.org/10.1007/978-3-030-01784-2
  • Greenidge, K., Drakes, L., & Craigwell, R. (2010). The external public debt in the Carribbean Community. Journal of Policy Modeling, 32(3), 418–431. https://doi.org/10.1016/j.jpolmod.2010.02.004
  • Gülcemal, T. (2022). External debt and economic growth in emerging economies: Panel causality analysis. Sosyoekonomi, 30(52), 27–36. https://doi.org/10.17233/sosyoekonomi.2022.02.02
  • Gylfason, T. (1991). Inflation, growth, and external debt: A view of the landscape. The World Economy, 14(3), 279–297. https://doi.org/10.1111/j.1467-9701.1991.tb00849.x
  • Koh, W. C., & Yu, S. (2021). Chapter 5: Macroeconomic and financial sector policies. In M. A. Kose & F. Ohnsorge (Eds.), A decade after the global recession: Lessons and challenges for emerging and developing economies (pp. 211–253). World Bank Publications.
  • Kose, M. A., & Ohnsorge, F. (2021). Chapter 1: A decade after the global recession: Lessons and challenges. In M. A. Kose & F. Ohnsorge (Eds.), A decade after the global recession: Lessons and challenges for emerging and developing economies (pp. 5–53). World Bank Publications.
  • Kose, M. A., Nagle, P., Ohnsorge, F., & Sugawara, N. (2021). Global waves of debt: Causes and consequences. World Bank Publications.
  • Kose, M. A., Ohnsorge, F., & Sugawara, N. (2020, February). Benefits and costs of debt: The dose makes the poison (World Bank Policy Research Working Paper, No. 9166). World Bank. https://doi.org/10.1596/1813-9450-9166
  • Mensah, D., Aboagye, A. Q. Q., Abor, J. Y., & Kyereboah-Coleman, A. (2017). External debt among HIPCs in Africa: accounting and panel VAR analysis of some determinants. Journal of Economic Studies, 44(3), 431–455. https://doi.org/10.1108/JES-05-2015-0080
  • Mijiyawa, A. G. (2022). External debt in developing countries since HIPC and MDRI: What are the driving factors? International Journal of Finance & Economics, 27(2), 1683–1699. https://doi.org/10.1002/ijfe.2236
  • Newey, W. K., & West, K. D. (1994). Automatic lag selection in covariance matrix estimation. The Review of Economic Studies, 61(4), 631–653. https://doi.org/10.2307/2297912
  • Onafowora, O., & Owoye, O. (2019). Impact of external debt shocks on economic growth in Nigeria: a SVAR analysis. Economic Change and Restructuring, 52, 157–179. https://doi.org/10.1007/s10644-017-9222-5
  • Özata, E. (2017). Determinants of external debt accumulation in Turkey: Evidence from an ARDL bound test approach. Journal of Business & Economic Policy, 4(4), 134–143. https://jbepnet.com/journals/Vol_4_No_4_December_2017/14.pdf
  • Pedroni, P. (2004). Panel cointegration: Asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econometric Theory, 20(3), 597–625. https://doi.org/10.1017/S0266466604203073
  • Persyn, D., & Westerlund, J. (2008). Error-correction-based cointegration tests for panel data. The Stata Journal, 8(2), 232–241. https://doi.org/10.1177/1536867X0800800205
  • Pesaran, M. H. (2004, August). General diagnostic tests for cross section dependence in panels (IZA Discussion Paper Series, No. 1240). The Institute for the Study of Labor [IZA]. https://docs.iza.org/dp1240.pdf
  • Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross-section dependence. Journal of Applied Econometrics, 22(2), 265–312. https://doi.org/10.1002/jae.951
  • Pesaran, M. H., & Smith, R. (1995). Estimating long-run relationship from dynamic heterogeneous panels. Journal of Econometrics, 68(1), 79–113. https://doi.org/10.1016/0304-4076(94)01644-F
  • Pesaran, M. H., & Yamagata, T. (2008). Testing slope homogeneity in large panels, Journal of Econometrics, 142(1), 50–93. https://doi.org/10.1016/j.jeconom.2007.05.010
  • Pesaran, M. H., Ullah, A., & Yamagata, T. (2008). A bias-adjusted LM test of error cross-section independence. The Econometrics Journal, 11(1), 105–127. https://doi.org/10.1111/j.1368-423X.2007.00227.x
  • Ramzan, M., & Ahmad, E. (2014). External debt growth nexus: Role of macroeconomic policies. Economic Modelling, 38, 204–210. http://dx.doi.org/10.1016/j.econmod.2013.12.014
  • Reinhart, C. M., & Trebesch, C. (2015). The pitfalls of external dependence: Greece, 1829–2015. Brookings Papers on Economic Activity, 2015(2), 307–328. https://doi.org/10.1353/eca.2015.0000
  • Sağdıç, E. N., & Yıldız, F. (2020). Factors affecting external debt in transition economies: The case of Central Asia and the Caucasus. Uluslararası Yönetim İktisat ve İşletme Dergisi, 16(4), 891–909. http://dx.doi.org/10.17130/ijmeb.853521
  • Tiruneh, M. W. (2004). An empirical investigation into the determinants of external indebtedness. Prague Economic Papers, 13(3), 261–277. https://doi.org/10.18267/j.pep.242
  • Verma, A. K., & Sengupta, R. (2021). Interlinkages between external debt financing, credit cycles and output fluctuations in emerging market economies, Review of World Economics, 157, 965–1001. https://doi.org/10.1007/s10290-021-00424-3
  • Waheed, A. (2017). Determinants of external debt: A panel data analysis for oil and gas exporting and importing countries. International Journal of Economic and Financial Issues, 7(1), 234–240. https://dergipark.org.tr/tr/download/article-file/364168
  • Westerlund, J. (2007). Testing for error correction in panel data. Oxford Bulletin of Economics and Statistics, 69(6), 709–748. https://doi.org/10.1111/j.1468-0084.2007.00477.x
  • World Bank. (2017, June). Global economic prospects: A fragile recovery (A World Bank Group Flagship Report). World Bank. https://doi.org/10.1596/978-1-4648-1024-4
  • World Bank. (2022). International debt statistics. World Bank Publications.
  • World Bank & International Monetary Fund [IMF]. (2022, April 01). Making debt work for development and macroeconomic stability (Document No. DC2022-0003). Development Committee. https://www.devcommittee.org/content/dam/sites/devcommittee/doc/documents/mgr/Final%20on%20Making%20Debt%20Work_DC2022-0003.pdf
There are 46 citations in total.

Details

Primary Language English
Subjects Cyclical Fluctuations, Monetary Policy, Macroeconomics (Other)
Journal Section Articles
Authors

Ali İlhan 0000-0001-6201-5353

Early Pub Date December 30, 2023
Publication Date December 31, 2023
Submission Date April 17, 2023
Published in Issue Year 2023 Volume: 16 Issue: 2

Cite

APA İlhan, A. (2023). An Investigation of the Factors Influencing External Debt in Emerging Market Economies. International Journal of Social Inquiry, 16(2), 497-509. https://doi.org/10.37093/ijsi.1284735
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