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How Much Is Too Much Debt for South Africa? A Threshold Nonlinear Autoregressive Distributive Lag (T-NARDL) Perspective

Author

Listed:
  • Andrew Phiri

    (Nelson Mandela University, South Africa)

  • Asanda Fotoyi

    (Nelson Mandela University, South Africa)

Abstract

Since the global financial crisis, South African fiscal authorities have acquired debt at a faster rate compared to other economies, which, according to recent growth theory, implies that the economy has a lower debt tolerance or threshold level than previously thought. Our study presents country-specific debt threshold estimates for the South African economy based on reduced-form regressions derived from an endogenous growth model of public debt that incorporates public investment as a channel through which debt can influence economic growth. We estimate the reduced-form regressions using the threshold nonlinear autoregressive distributed lag (T-NARDL) cointegration model, which we apply to quarterly time series spanning from 1960:q1 to 2020:q4. We identify a debt threshold of 47%, which is much lower than that predicted by previous panel-based studies. Similarly, the corresponding public investment threshold estimate of 2.8% is lower than that prescribed by previous literature. However, our study shows that both public debt and public investment are too high to be growth enhancing, and we provide policy recommendations based on these findings.

Suggested Citation

  • Andrew Phiri & Asanda Fotoyi, 2023. "How Much Is Too Much Debt for South Africa? A Threshold Nonlinear Autoregressive Distributive Lag (T-NARDL) Perspective," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 21(2 (Summer), pages 93-120.
    • Handle: RePEc:mgt:youmgt:v:21:y:2023:i:2:p:93-120
    DOI: 10.26493/1854-6935.21.93-120
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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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