Analysis On Determinants Of Outstanding External Debt&Debt Sustainability Lessons For Timor-Leste

This study is to analyze determinants of the ratio of outstanding external debt to GDP. We run multiple regressions of four independent variables (ratio of debt service to export, ratio of import to GDP, ratio of fiscal balance to GDP, national GDP in current price) to analyze how these four independent variables influence the level of outstanding external debt for both developing and developed countries. In this paper we analyze factors that influence outstanding external debt expressed as ratio of GDP with data across115countries for the year of2012. We estimate our model using Ordinary Least Squares method. We found out that most important factors that influence a country’s debt are imports as percentage of GDP which demonstrates that a country with higher import to GDP ratio can aim for more loans holding other things constant. On the other hand, debt service to exports ratio is another significant indicator and shows that countries that have more debt service to exports have less ability to repay debt and therefore their debt will increase. Fiscal balance as a percentage of GDP shows that countries with high budget deficit as percentage ofGDP are more likely to borrow. On the basis of our findings we suggest that in order to relieve their outstanding external debt, both developing and developed countries should aim for export promotion and import substitution strategy. By opening up to world trade they will increase their exports thereby earning hard currency and also being able to specialize in trade in international world market. They can repay their debts easier and will probably have less need to borrow or even when they do so, be able to repay the debt on time. In addition we caution of the limitation of our findings inherent to macroeconomic variables and demonstrated by limitations in data which causes some seemingly insignificant independent variables (which have been removed from the model), which necessarily calls for further research. For further research we recommend to include a variable to assess the quality of institution and policy which we believe will better explain different stage of development of each country which can reflect their ability to manage and handle their debt. The author personally supports Timor-Leste government’s policy to take loan, as long as it is managed appropriately in order to be serviced on time and to be invested productively in capital expenditure (investment) rather than in current expenditure (consumption). Given Timor-Leste’s huge trade deficit, huge budget deficit, weak institutions and policy it should be very careful in managing its debt so that in the future it can service the debt by the return it will earn from its investment. Given the weaknesses as stated above, with high GDP growth rate annually can give some hope that if the money borrowed can be invested productively it can bring high return in the future and in turn can help boost the investment by private sector to sustain long term economic and social development of the country. The abundant natural resources (oil and gas) will also help the country to continuously finance/boost (or guarantee) its economy.