Debt and Credit Quality in Central America, Panama, and the Dominican Republic

29 Pages Posted: 21 Jun 2016 Last revised: 27 Jul 2016

See all articles by Guillermo Lagarda

Guillermo Lagarda

Global Development Policy Center Boston University

Jordi Prat

Inter-American Development Bank (IDB)

Marco Solera

Inter-American Development Bank (IDB)

Javier H Beverinotti

Inter-American Development Bank (IDB)

Date Written: July 26, 2016

Abstract

Credit quality has long been associated with the level of indebtedness. But the sole fact that there are countries with high creditworthiness and large stocks of debt suggests that indebtedness is just one of many factors which determine credit quality. In this paper we investigate the role that economic fundamentals have on risk perception of public debt, through both direct and indirect effects. Countries are grouped into four clusters, each corresponding to a different stage of development in their economic fundamentals. We find that the effect of the debt burden on credit quality is conditional on the current level of economic fundamentals and the degree to which they are improving. A transition to stronger fundamentals would require moving to a better cluster but would ease pressure on any debt adjustment necessary to improve creditworthiness. Consequently, there are two types of approaches countries in CAPDR could focus on to improve credit quality. On the one hand, there are a set of actions which could be carried out in the short run to move within a particular group or cluster-fiscal toolkit. On the other hand, there are actions, which in the medium term may enable a country to transition to a group with better credit perception-structural changes.

Suggested Citation

Lagarda, Guillermo and Prat, Jordi and Solera, Marco and Beverinotti, Javier H, Debt and Credit Quality in Central America, Panama, and the Dominican Republic (July 26, 2016). Available at SSRN: https://ssrn.com/abstract=2798426 or http://dx.doi.org/10.2139/ssrn.2798426

Guillermo Lagarda (Contact Author)

Global Development Policy Center Boston University ( email )

53 Bay State Road
Boston, MA 02215
United States

Jordi Prat

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

Marco Solera

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

Javier H Beverinotti

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

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