An empirical investigation into the determinants of external debt in Asian developing and transitioning economies

Abstract

This paper investigates the determinants of external debt in 32 Asian developing and transitioning economies for the period 1995-2019. Estimation is carried out using the generalized method of moments (GMM), which is capable of dealing with potential endogeneity problems. The results show that in both the short-and long-run, economic growth and investment reduce external debt, whereas exchange rate, trade, and government expenditure increase external debt. Diagnostic tests confirm the reliability and consistency of our findings, which should be taken into account by policymakers for policy formulation and implementation. Based on our empirical findings, relevant policy implications, aimed at reducing external debt in the selected Asian developing and transitioning economies, are provided for policy consideration.

External Debt Determinants: Do Macroeconomic and Institutional Ones Matter for Selected ASEAN Developing Countries?

“…Although inflation also increases the value of government expenditures, as long as tax revenue is greater than the increase in government spending, debt reduction occurs. There are research results that show a negative effect of inflation rate on external debt Beyene and Kotosz 2020;Sa gdiç and Yildiz 2020;Dawood et al 2021;Nguyen and Luong 2021;Okwoche and Nikolaidou 2022). Besides that, there are empirical results that show a positive effect (Waheed 2017).…”

Would external debts promote sustainable development in emerging and low‐income countries?

“…In our model, the problem of endogeneity could arise, given that the level of external debt held by countries may not be strictly exogenous and can in fact be determined by other social‐economic factors. For instance, Dawood et al (2021) suggest that economic growth decreases external debt, implying that as countries increase their income, they become less dependent on foreign debt and therefore reduce their borrowing. Likewise, Gokmenoglu and Rafik (2018) and Murwirapachena and Kapingura (2015) pointed out a negative relationship between economic growth and external debt.…”

Unveiling external debt dynamics: Interdependencies of macroeconomic variables in ASEAN-7

“…Mudzingiri (2014) explored the impact of the 2007-2009 global financial crisis, noting that declining commodity prices resulted in diminished exports in Zimbabwe, thereby restricting a vital source of revenue for servicing foreign debt. The accumulation of debt can lead to fiscal imbalances and excessive foreign borrowing, making a country more vulnerable to various shocks and crises (Alper et al, 2022;Dawood et al, 2021). Foreign debt acts as a financing mechanism for government initiatives across structural and sectoral areas such as infrastructure, health, education, and social protection (Law et al, 2021;Bogdan & Lomakovych, 2021;Gerard et al, 2020;Furlong, 2021).…”