Prediction of debt crisis in Southern African Development Community (SADC)

Abstract

Debt levels in the Southern African Development Community (SADC) have been rising over the years as countries undertake infrastructure projects and the increased use of bilateral and private credit. Although on aggregate the debt levels are within SADC recommendations on macroeconomic convergence, there are growing fears that a number of countries in the region might default and indeed some are already in default. The frequent occurrence of debt crisis is a cause for concern. This research is an attempt to determine the significant predictors from a small set of variables commonly touted as important in debt crisis prediction. The research considered the output gap, real exchange rate, external debt ratios, commodity shocks and quality of governance as potential predictors. The factor variables being of particular interest Empirical findings on these potential predictors is somehow mixed, which partly is accounted for by the differences in model specifications from author to author. The research employed the event study and fixed effects logistic regression for modelling the probability of default of public debt. Results of the model illustrate that governance indicators and commodity price shocks (global level) were not statistically significant predictors of debt crisis as commonly suggested by theory. However the external debt, output and the real foreign exchange rate were all significant. Real output was shown to be one of the most important predictors of debt crisis. The estimated probability model fared relatively better than a random model.