Determinants of Bulgarian Brady bond prices - an empirical assessment

To analyze the main determinants of secondary market prices of Bulgarian Brady Bonds, the authors investigate to what extent fluctuations in domestic fundamentals affect the bonds'secondary market price. They also assess the extent to which external shocks affect the bonds'prices. They estimate the long-term relationship between domestic fundamentals and market prices of bonds, using co-integration techniques. In the long-run, they find that gross foreign reserves and exports had a positive effect on bond prices and the real exchange rate and Mexico's nominal exchange rate depreciation had a negative effect. In the short run, the Asian crisis had a negative impact, and Bulgaria's change in political regime and introduction of a currency board had a positive impact. Mexico's economic crisis in 1995 had contagion effects. The authors'empirical results confirm the view that the so-called fundamentals approach should be used to supplement the analysis of spillover effects for Bulgaria Brady bonds.Payment Systems&Infrastructure,Economic Theory&Research,International Terrorism&Counterterrorism,Environmental Economics&Policies,Settlement of Investment Disputes,Markets and Market Access,Settlement of Investment Disputes,Access to Markets,Economic Theory&Research,Environmental Economics&Policies

Quantitative approaches to fiscal sustainability analysis : a new World Bank tool applied to Turkey

Fiscal sustainability analysis (FSA) is an important component of macroeconomic analysis. The authors review various quantitative approaches to FSA with a major objective to bring these approaches together and to present a user-friendly tool for FSA that reflects modern developments. They combine a dynamic simulations approach with a simplified version of the steady-state consistency approach. They also incorporate two different methods to deal with uncertainty: user-defined stress tests and stochastic simulations. The tool goes further by evaluating the required fiscal adjustment as a consequence of the stochastic realizations of the exogenous variables. Furthermore, the fiscal sustainability tool incorporates an endogenous debt feedback rule for the primary surplus, a fiscal policy reaction function. Besides outlining the theoretical framework, the authors also present a case study for Turkey.Economic Theory&Research,External Debt,Economic Stabilization,Banks&Banking Reform,Public Sector Economics&Finance

Fiscal deficits, monetary reform, and inflation stabilization in Romania

Unsustainable fiscal deficits were the chief reason for the inflation that has persisted in Eastern Europe since 1989. Deficits need to be cut back, but by how much for a given inflation target? The authors develop a simple framework for debt, the deficit, and inflation to study the interactions between fiscal and monetary policy in Romania's economy. This framework can be used to 1) determine the financeable deficit and the required deficit reduction for a given rate of output growth, inflation rate, and target for debt-output ratios, and 2) find the rate, and target for which nofiscal adjustment is needed. They use this framework to assess consistency between inflation, monetary reform, and fiscal policy in Romania. Many of the issues in Romania are similar to those in other countries. But Romania is an interesting case because of its history of unsuccessful stabilization attempts. The authors'results suggest that fiscal problems during 1992-94 were masked by shifting government expenses to the books of the National Bank of Romania so that the government deficit did not fully reflect public spending. In addition, the effects of delayed fiscal adjustment were mitigated by exchange rate overvaluation and favorable debt dynamics. In the late 1990s, however, debt dynamics worsened and the economy experienced significant real depreciation. That exacerbated the fiscal problems and increased the fiscal adjustment needed to restore consistency.Economic Theory&Research,Payment Systems&Infrastructure,Environmental Economics&Policies,Public Sector Economics&Finance,Banks&Banking Reform,Economic Stabilization,Economic Theory&Research,Macroeconomic Management,Environmental Economics&Policies,Public Sector Economics&Finance

Liquidity constraints and investment in transition economies : the case of Bulgaria

We use Bulgarian firm level data to investigate the impact of liquidity constraints on investment performance. Internal funds are an important determinant of investment in most industrialized countries. We test whether internal funds are important for firm investment during the current transition process in Bulgaria. We use a simple accelerator model of investment to test whether liquidity constraints are relevant in the case of Bulgaria. Our estimations are based on data for the period 1993-1995, prior to the Bulgarian financial crisis in 1996-97. It turns out that Bulgarian firms are liquidity constrained, and that firms’ size and financial structure help to distinguish between firms that are more and less liquidity constrained. In our view liquidity constraints can be given a different interpretation in the case of transition economies as compared to Western economies. A more in depth analysis of the data reveals that liquidity constraints and consequently the access to external funds for Bulgarian firm investment are to be seen against the background of soft-budget constraints and the failure of the financial system to enforce an efficient allocation of funds. In our view the lack of liquidity constraints may actually been seen as a sign of financial weakness in the case of Bulgaria.

Liquidity constraints and investment in transition economies - the case of Bulgaria

The authors use firm level data on Bulgaria to investigate the impact of liquidity constraints on firms'investment performance. Internal funds are a important determinant of investment in most industrial economies. The authors use a simple accelerator model of investment to test whether liquidity constraints are relevant in Bulgaria's case. Their estimates are based on data for 1993-95, before Bulgaria's financial crisis of 1996-97. It turns out that Bulgarian firms are liquidity-constrained and that firms'size and financial structure help to distinguish between firms that are more and less liquidity-constrained. In the authors'view, liquidity constraints in transition economies should be interpreted in different ways than those in industrial economies. In Bulgaria, liquidity constraints, and hence access to external funds should be seen in the context of soft budget constraints and the financial system's failure to enforce the efficient allocation of funds. The relationship between liquidity constraints and firm characteristics may actually be the opposite of what is normally the case in industrial countries. In Bulgaria, lack of liquidity constraints may be a sign of financial weakness.Banks&Banking Reform,Payment Systems&Infrastructure,Economic Theory&Research,Financial Intermediation,Environmental Economics&Policies,Environmental Economics&Policies,Municipal Financial Management,Economic Theory&Research,Financial Intermediation,Banks&Banking Reform

Nigeria's growth record : Dutch disease or debt overhang ?

Nigeria's oil boom has not brought an end to perennial stagnation in the non-oil economy. Is this the unavoidable consequence of the resource boom or have misguided policies contributed? This paper indicates that the extreme volatility of expenditure rather than Dutch Disease effects are behind the disappointing non-oil growth record. Fiscal policies failed to smooth highly volatile oil income; on the contrary government expenditure was more volatile than oil income. The authors provide econometric evidence showing that volatility of expenditure was increased by debt overhang problems. Moreover, they also find evidence of voracity effects that exacerbated expenditure volatility prior to 1984.Public Sector Expenditure Analysis&Management,Economic Theory&Research,Public Sector Economics&Finance,Markets and Market Access,Economic Stabilization

Long-term fiscal risks and sustainability in an oil-rich country : the case of Russia

Russia entered the global crisis with strong fiscal position, low public debt, and large fiscal and monetary reserves, which helped it cushion the crisis shocks. But the rise in the non-oil fiscal deficit in 2007-08 and, more importantly, the massive impact of the global crisis in late 2008 and 2009 have dramatically altered Russia's medium-term and long-term economic and fiscal outlook. While Russia is emerging from this crisis on a much stronger footing than during the 1998-09 crisis thanks to its strong-pre crisis fundamentals, large fiscal reserves and solid management of the crisis, it will nevertheless need to implement sustained fiscal adjustment in the coming years. Both revenue and expenditure measures will be needed. This will require 2-3 percentage points of GDP in fiscal adjustment for about five years in addition to keeping total expenditure levels at a relatively low 31.5 percent of GDP, consistent with long-term social expenditure needs and requirements of long-term fiscal sustainability. Following a period of adjustment, if Russia would restrain its long-term non-oil deficits to the permanent income (PI) equivalent of its oil revenues as proposed in this paper, its fiscal policy will return to long-term sustainable path. The long-term, sustainable level of non-oil fiscal deficit is estimated at about 4.3 percent of GDP. With the 2009 actual non-oil fiscal deficit of about 14 percent of GDP, this implies significant and sustained fiscal adjustment over the medium term. The expenditure needs of the social security system as well as a reduction in key non-oil taxes represent a major fiscal risk to all scenarios.Debt Markets,Public Sector Expenditure Policy,Environmental Economics&Policies,Economic Stabilization,Currencies and Exchange Rates

The"how to"of fiscal sustainability : a technical manual for using the fiscal sustainability tool

Fiscal sustainability analysis (FSA) is an important component of macroeconomic analysis for many developing countries. To further enhance understanding of fiscal policy and the constraints faced by policymakers, the authors develop a toolkit for FSA in middle-income countries which builds on previous work in this area and on new developments in dealing with uncertainty. The FSA toolkit includes an Excel-based FSA tool and a technical manual accompanying it. The FSA tool is standardized and simple, but at the same time flexible enough to allow for user-defined country-specifics. This manual provides step-by-step technical instructions for running the FSA tool and includes mathematical appendices and a glossary.Economic Theory&Research,External Debt,Strategic Debt Management,Economic Stabilization,Public Sector Economics&Finance