OECD Economics Department Working Papers

ISSN :: 1815-1973 (online)
DOI :: 10.1787/18151973

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Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

Assessing the Sensitivity of Hungarian Debt Sustainability to Macroeconomic Shocks under Two Fiscal Policy Reactions

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Authors:

Pierre Beynet¹, Edouard Paviot¹

Author Affiliations

1: OECD, France

Publication Date

09 Mar 2012

Bibliographic information

No.:: 946

Pages

DOI

10.1787/5k9d195gtkf8-en

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Hungarian debt level has steadily increased since 2001, with the debt-to-GDP ratio reaching about 84% at end-2011. This high level combined with significant volatility of macroeconomic variable influencing potential future debt paths – GDP growth, exchange rate and interest spreads – put Hungarian debt sustainability at risk. To assess debt sustainability over a 5-year horizon, a stochastic debt simulation has been conducted by applying random shocks derived from historical volatility to a baseline scenario. These simulations are used to derive fan charts showing the distribution probability of debt under different sets of assumptions regarding i) the nature of shocks – temporary or permanent – and ii) fiscal policy reactions, i.e. either allowing automatic stabilizers to operate or not. Results indicate that the probability of a debt ratio going beyond 90% of GDP in the next five years – a level beyond which debt is likely to hurt growth – is non-negligible (at least 25% in the most favourable scenario), especially if volatility turns out to be higher than observed in the past. The main risks to debt sustainability lie in growth shocks, whose volatility is high in Hungary. This highlights the crucial role of growth for debt sustainability. The impact of exchange rate depreciation can also be important, especially if shocks are permanent, while the rise in interest spreads would have a much more limited impact as debt is only progressively rolled over. Finally, fiscal policy reaction matters. Offsetting the impact of automatic stabilizers significantly reduces the width of potential debt paths over the five-year horizons.

Keywords:: risk analysis, fan charts, fiscal reaction function, Hungary, public debt sustainability

JEL Classification:

C15: Mathematical and Quantitative Methods / Econometric and Statistical Methods and Methodology: General / Statistical Simulation Methods: General
E62: Macroeconomics and Monetary Economics / Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook / Fiscal Policy
H62: Public Economics / National Budget, Deficit, and Debt / Deficit; Surplus
H63: Public Economics / National Budget, Deficit, and Debt / Debt; Debt Management; Sovereign Debt