Constructing country-specific debt sustainability indices for developing countries

Contemporary crises continue to keep governments in protracted periods of borrowing, increasing the stock and flow of sovereign indebtedness. Single metrics of public debt – such as the debt-to-GDP ratio – provide an incomplete profile of a nation’s debt position, which is largely determined by country-specific factors. We consolidate various indicators of public debt to construct a novel debt sustainability index and its companion debt volatility index. We demonstrate our approach, based on principal component analysis, using a natural resource-rich but relatively data-poor country – Trinidad and Tobago – where debt management is a recurring macroeconomic concern, but comprehensive debt indices remain unavailable. The movements in our indices align with historical episodes that would influence country-specific public debt levels. Our approach is straightforward to adapt and apply to developing countries, where a uniform measure of debt is either unavailable or provide an incomplete perspective of fiscal stress when such a measure exists. We further illustrate the usefulness of the constructed indices by investigating the debt- growth nexus. Consistent with economic theory of countries with relatively lower debt levels, our novel debt indices for this country provide evidence of a positive, significant, and robust impact of debt on growth when the traditional debt-to-GDP measure suggests none.