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Debt Sustainability Index: Updated scores showing the risk of debt distress

  • We update our debt sustainability index and expand coverage from 46 to 72 countries

  • The most vulnerable (excl. those in default) are Jamaica, Ghana, Panama, Kenya, Tunisia, Laos, Egypt & Pakistan

  • The least vulnerable (excl. Russia) are Azerbaijan, Vietnam, Uzbekistan, Peru, Nigeria, Gabon & Ecuador

Debt Sustainability Index: Updated scores showing the risk of debt distress
Tellimer Research
29 October 2022
Published byTellimer Research

Access Tellimer’s full Debt Sustainability Index covering 72 countries by subscribing to the Tellimer Data Channel.

Following the release of the IMF’s updated October 2022 WEO Database earlier this month, we have updated our sovereign debt sustainability index to assess debt risks by comparing 27 key metrics across a sample of emerging and frontier markets. We have also expanded it to cover all JP Morgan Emerging Market Bond Index (EMBI) constituents, plus several other countries of interest, increasing our sample from 46 to 72 countries.

We score each variable in terms of standard deviations better (worse) than the sample median and take the simple average across variables to arrive at a composite debt sustainability index, removing 18 countries due to insufficient data (leaving 54 with an overall score). The resulting output is a quick and dirty way to quantify debt sustainability risk for each country on a relative basis:

Summary score

Below we present the key takeaways from our latest index update. To request access to the full Sovereign Debt Sustainability Index dataset, please click here.

Results

After excluding countries with insufficient data and those that have already defaulted (including Sri Lanka, Zambia, and Lebanon), we find that the most vulnerable countries are Jamaica, Ghana, Panama, Kenya, Tunisia, Laos, Egypt, Pakistan, Jordan and Mongolia. On the other hand, the least vulnerable (excluding Russia) are Azerbaijan, Vietnam, Uzbekistan, Peru, Nigeria, Gabon, Ecuador, Serbia, Kazakhstan and Cameroon.

A simple scatter plot shows that there is a negative relationship between the overall debt sustainability score and the country risk premium (measured by the Bloomberg EM Sovereign OAS), as we should expect. A linear line of best fit is statistically significant at the 99% confidence level with an R2 of 31%. Excluding the countries that are in the process of restructuring (including Ethiopia, Sri Lanka and Zambia), the relationship is statistically significant at a 95% confidence level with an R2 = 12%, indicating that the index is best at flagging cases of extreme stress.

Scatter

We also backtest our model by regressing the debt sustainability score from the May update by the change in spread for each country since the last WEO was published on 19 April (notably this is before the index was expanded from 46 to 72 countries). We find that the debt sustainability score explained 16% of the change in spreads over the subsequent 6-month period at a 95% confidence level, with each standard deviation difference in score translating to a 755bps difference in performance. When Sri Lanka and Ethiopia are excluded, however, the R2 drops to 5% and the model is statistically insignificant.

Contrary to our previous backtesting exercises (see here and here for the most recent two), which found the debt sustainability score to be a solid predictor of subsequent performance, the relationship appears to have broken down in the most recent 6-month period (which is not surprising given the high degree of market volatility over that period). We will revisit the newly expanded dataset when we next update the index to see if its predictive power is restored, but still think it can be relied upon to flag countries with a high potential for debt distress (if not as a predictor of near-term spread changes).

More details on our methodology and sources are available here.