World commodity prices and partial default in emerging markets: an empirical analysis

Most sovereign defaults are partial, with heterogeneous post-default outcomes, and commodity prices are an important determinant of sovereign default and the subsequent restructurings. In the case of emerging countries, as a result of direct dependence of government on revenues from commodity exports, declines in commodity prices reduce government’s resources to service the external debt thereby increase the chances of default. In this paper, we construct a country-specific commodity price index with time-varying weights based on commodity exports to quantify the impact of commodity prices on the partial default rate measured by debt arrears. We show that declines in commodity prices have a significant, positive effect on the default rate. The overall predicted effects for a one-standard deviation decrease in a composite of the level and change of the price index at its 1st, 2nd, and 3rd quartile, on average, are 14.2, 12.5, and 9.3 percentage points respectively. We also show that for a country-specific one-standard deviation decrease in the composite price index, the predicted effect varies from insignificant to an increase of 33.8 percentage points. The country-specific effect on the default rate generally increases in magnitude with a country’s dependence on commodity exports, while it depends heterogeneously on external indebtedness—increasing in magnitude for low levels (below a threshold of about 30 percent) of debt and decreasing thereafter.