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Natural Resources and Sovereign Risk in Emerging Economies: A Curse and a Blessing

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Abstract

Emerging economies that are large oil producers have sizable external debt, their country risk rises when oil prices fall, and several of them have defaulted at least once since 1979. Moreover, while oil and non-oil output reduce country risk on impact and in the long-run, oil reserves reduce it marginally on impact but increase it in the long-run. We propose a model of sovereign default and oil extraction consistent with these observations. The sovereign manages oil reserves strategically to make default less painful by altering the value of autarky, and hence its sustainable debt falls. All else equal, default is less likely in states in which reserves or oil prices are higher, or non-oil GDP is lower, but the equilibrium dynamics of reserves and country risk in response to oil-price shocks switch from negatively correlated on impact to positively correlated for several years.

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  • Franz Hamann, 2018. "Natural Resources and Sovereign Risk in Emerging Economies: A Curse and a Blessing," Working Papers 2018-32, Federal Reserve Bank of St. Louis, revised 17 Mar 2023.
    • Handle: RePEc:fip:fedlwp:2018-032
    DOI: 10.20955/wp.2018.032
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    1. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    2. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 225-250.
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    Cited by:

    1. Tamon Asonuma & Hyungseok Joo, 2023. "Sovereign Defaults and Debt Restructurings: Public Capital and Fiscal Constraint Tightness," School of Economics Discussion Papers 0323, School of Economics, University of Surrey.
    2. Galego Mendes,Arthur & Pennings,Steven Michael, 2020. "One Rule Fits All ? Heterogeneous Fiscal Rules for Commodity Exporters When Price Shocks Can BePersistent: Theory and Evidence," Policy Research Working Paper Series 9400, The World Bank.
    3. Tamon Asonuma & Hyungseok Joo, 2021. "Public Capital and Fiscal Constraint in Sovereign Debt Crises," School of Economics Discussion Papers 0621, School of Economics, University of Surrey.
    4. Cheuathonghua, Massaporn & de Boyrie, Maria E. & Pavlova, Ivelina & Wongkantarakorn, Jutamas, 2022. "Extreme risk spillovers from commodity indexes to sovereign CDS spreads of commodity dependent countries: A VAR quantile analysis," International Review of Financial Analysis, Elsevier, vol. 80(C).

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    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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