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Analysis: How Much Debt Can a Country Carry?

Article Summary:

How much debt can a country carry and at what costs to its investment grade? Currently, both Costa Rica and Panama are candidates for total investment grade. In fact, Panama is rated as investment grade, while El Salvador, Guatemala and Dominican Republic are not investment grade, but are capable of making improvements and reaching and investment grade status.

Photo Credit: America Economia

Original Article Text From America Economia via Google Translate :

Analysis & Opinion: The debt limit of Central America, Panama and R. Dominican

How much debt can have a country? There are several ways to answer this question.
One is to find the level of debt that can be paid safely in most circumstances faced by the country. Another serious look at the debt and space to increase public spending, which raises the question: what level of debt a government loses its ability to stimulate growth by expanding the expense? A third approach would be to directly observe the growth and debt, and ask at what level of debt is affected growth negatively?

Several studies have safe levels of public debt (as a percentage of GDP) are very variable from 25 to 35% for emerging economies and from 65 to 90% for industrialized economies.

Debt intolerance. An alternative approach would be to analyze what has been called “debt intolerance”. This approach starts from the observation that different economies have different levels of “tolerance” levels of public debt, where such tolerance depends on many factors: the institutions, economic structure, income, growth, among the most important.

Some economies appear to be very intolerant of debt with a government that repeatedly enters into bankruptcy or restructuring at relatively low levels (as has been the case in many countries of Latin America), while other economies can maintain high levels debt for many years without being in default (as the case of Japan).

Our study is based on the latter concept. To measure this debt intolerance use the risk ratings developed by Institutional Investor Magazine (IIR, for its acronym in English). This is a score ranging from 1 (worst) to 100 (best), and there for more than 150 countries since 1989.

Taking this qualification, we tried to explain his behavior with some other indicators such as prior year’s value on the risk rating (the story goes), inflation (a form of domestic debt default), an indicator of the slow payment of existing debt or restructuring, the level of GDP per capita (an indicator that a country’s ability to make efficient use of debt to stimulate growth), and the general level of public debt (external and internal).
Results.

In 2010, Costa Rica had a public debt of 37.5% of GDP and a 55-IIR. The IIR of 55 is consistent with a credit rating that is in the intermediate range (borderline) between non-investment grade (less IIR) and investment grade (higher IIR).

For countries that have access to debt markets, the credit rating of investment can be a great advantage, reflected in a reduction in borrowing costs significantly. Therefore, what would it take to get to Costa Rica investment grade? According to our analysis, reference should be used as a score of 58.7 in the IIR, which is consistent with a debt level of 25% of GDP (see figure).

This calculation can be replicated in any other country for which data are available. In our analysis we have applied this methodology to several Central American countries (Costa Rica, El Salvador, Guatemala), Panama and Dominican Republic.

What we found is that these countries are divided naturally into two groups. Costa Rica and Panama are candidates for total investment grade. In fact, Panama is rated as investment grade, but it could consolidate its rating by reducing its debt by about 7 percentage points, from 40 to 33% of GDP.

El Salvador, Guatemala and Dominican Republic are not investment grade and could improve its rating with a target range through the IIR (intermediate limit on the graph), where they could begin to be considered for investment grade. To do this, El Salvador would have to reduce its debt by 8 points (to 34% of GDP), Guatemala with 13 points (11% of GDP), and the Dominican Republic by 23 points (to 14% of GDP), which reflecting their different levels of debt intolerance.

Link to Original Article:

From America Economia

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