External Factors in Debt Sustainability Analysis: An Application to Latin America?

This paper develops a framework for debt sustainability analysis that integrates econometric estimates of the effect of global factors on a set of key domestic variables that determines public and external debt dynamics. The methodology is applied to assess debt sustainability in Latin America—a region highly sensitive to external conditions. Results suggest that, while some countries in the region are well placed to withstand moderate or even large foreign shocks, many would benefit from strengthening their fiscal positions to be able to deploy countercyclical policies under adverse scenarios, especially tail events. External sustainability, on the other hand, does not appear to be a source of concern for most countries.