Public debt sustainability in Serbia before and during the global financial crisis

Abstract

We have analyzed the behaviour of primary fiscal balance and public debt in Serbia before and in the aftermath of the global financial crisis. The results of our analysis are: i) public debt to GDP ratioexhibits (near) unit root behaviour with an overall upward time trend; ii) the response of primary fiscal balance to public debt has been insufficient to mean revert the upward trend in government debt; iii) the efforts of the Serbian government to repay the debt principal after the fiscal rule breach have not been persistent, providing empirical support to the fiscal fatigue hypothesis; iv) the government budget constraint has deteriorated since the beginning of the global financial crisis; v) the response of primary fiscal balance to public debt from the onset of the global financial crisis has dropped more severely in comparison to other European economies.

Fiscal reaction to interest payments: The case of Serbia

“…Third, the response for public debt jumps to 0.05, simultaneously gaining statistical significance at 5% level. The obtained estimate is identical to the one in Andrić et al (2016) who focus solely on the fiscal prudence of public debt between 2004Q3 and 2014Q3.…”

“…The responses are equal to 1.00 (1% level significance), and they reinforce the claims about the absence of selfgenerating public debt in covering maturing interest expenses. The response of primary fiscal balance to public debt before the crisis equals 0.08 (pvalue=0.00), while the response after the crisis equals -0.01 (p-value=0.68), supporting, to a certain extent, the findings of Andrić et al (2016). Notes: *** 1% level significance, ** 5% level significance, * 10% level significance for HAC standard errors.…”

“…The statistical insignificance of reported estimates in the last two sub-samples is probably due to their relatively shorter time span and the associated loss of degrees of freedom. 26 Andrić et al (2016) Table 2. The statistical insignificance of aforementioned responses is probably due to overfitting and multicollinearity issues.…”

Public debt growth, great recession and fiscal consolidation: The Serbian episode

“…Finally, Bornhorst et al (2011) stress the importance of one-off operations such as the re-evaluation of financial assets and liabilities due to exchange rate changes. Since the Serbian government has issued around 80% of its debt in foreign currency, and given the sensitivity of Serbian real effective exchange rate to net capital flows, the change in public debt is chosen as the primary measure of public indebtedness growth (Andric et al, 2016a). Bai (1997) and Bai and Perron (1998, 2003a, 2003b) consider a multiple linear regression model with T periods and m potential structural breaks, i.e., m+1 regimes.…”

“…of GDP defined in fiscal rules. In 2014Q1, public debt breached yet another thresholdthe upper limit of 60% of GDP defined in Maastricht convergence criteria (Andric et al, 2016a). 1 Faced with aforementioned public finance trends, the Serbian government launched a fiscal consolidation programme at the end of 2014.…”