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Do Sovereign Catastrophe Bonds Improve Fiscal Resilience? An Application of Synthetic Control Method to Mexico

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  • Raluca Maran

Abstract

Natural disasters exert a significant impact on government finances. Catastrophe bonds (CAT bonds) constitute risk-transfer instruments that could help governments improve their fiscal resilience when catastrophic events occur. However, given the very limited issuance of sovereign CAT bonds so far, their actual impact on fiscal resilience is difficult to quantify. There is no literature on this topic currently available. I attempt to fill this gap and assess the impact of CAT bond payouts on the fiscal balance of the Mexican government using the synthetic control method. As an early adopter and repeated issuer of sovereign CAT bonds since 2006, Mexico received its first CAT bond payout in 2017. The payout was triggered by a high-magnitude earthquake that stroke the country in September 2017, with an estimated impact of 0.24% of Mexico’s gross domestic product (GDP). I identify 12 countries that experienced natural disasters with a similar impact on GDP in 2017, but which unlike Mexico have not received a CAT bond payout that year. I then compare post-2017 fiscal balances for Mexico with a synthetic control unit that combines the characteristics of the 12 similar but untreated countries, while controlling for other factors that could have had an impact on this fiscal variable. I find a positive and statistically significant impact of the 2017 CAT bond payout on Mexico’s fiscal balance compared to its synthetic control unit. A series of placebo studies and robustness tests confirm the validity of these findings.

Suggested Citation

  • Raluca Maran, 2023. "Do Sovereign Catastrophe Bonds Improve Fiscal Resilience? An Application of Synthetic Control Method to Mexico," Economics of Disasters and Climate Change, Springer, vol. 7(3), pages 431-455, November.
    • Handle: RePEc:spr:ediscc:v:7:y:2023:i:3:d:10.1007_s41885-023-00135-z
    DOI: 10.1007/s41885-023-00135-z
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    More about this item

    Keywords

    CAT bond payouts; Disaster risk finance; Natural disaster events; Sovereign CAT bonds; Synthetic control methods;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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