econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 20 August 2017

Do Oil-producing Countries Have Difficulties Repaying Their Debts?

from the St Louis Fed

People may think that countries with a lot of oil do not default on their sovereign debt, but that is not the case. Given that big oil-producing countries sometimes hold a significant amount of public debt, this issue is very relevant and is an important one to study.

Among the top 25 net oil exporters, for instance, the average public debt from 1979 to 2010 was about 50 percent of GDP.[1] All but eight of those 25 countries defaulted during that period, with the amount of time in default ranging from two years (Kuwait) to 25 years (Sudan).

In a recent paper with Franz Hamann and Enrique G. Mendoza, we examined the effect of having oil on sovereign risk, i.e., investors’ perception of the risk in lending to the country.[2] We found that possessing oil can have two different effects on sovereign risk. If a country produces more oil relative to the total size of its economy, then the country is viewed by investors as less risky. This result is very intuitive. Producing more oil means a country has a greater ability to repay its debt and, therefore, has a lower risk of sovereign default.

However, we also found that if a country has more oil underground, then it is viewed by investors as more risky in the long run. This result may seem counterintuitive, but having a large stock of oil may increase a country’s ability to withdraw from international financial markets, thereby raising the likelihood of default. At some point, defaulting may become more beneficial to a country than repaying its debt as long as it can still sell oil on international markets. This is the main result of our paper, which is quite surprising for a lot of people.

Notes and References

1 For figures showing average public debt to GDP and default episodes for these countries, see Arias, Maria A. and Restrepo-Echavarria, Paulina. “Sovereign Default and Economic Performance in Oil-Producing Economies." Economic Synopses, No. 20, 2016.

2 Hamann, Franz; Mendoza, Enrique G.; and Restrepo-Echavarria, Paulina. “Commodity Prices and Sovereign Default: A New Perspective on the Harberger-Laursen-Metzler Effect." Unpublished manuscript, 2016.

Additional Resources

Source

https://www.stlouisfed.org/on-the-economy/2017/august/oil-producing-countries-repaying-debts

Disclaimer

Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical News Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.




Econintersect Contributors








search_box
Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.







Keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government





























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved