Exploring the Macroeconomic Determinants of Private Non-Guaranteed External Debt in Low- and Middle-Income Countries

Abstract

In recent years, developing economies have witnessed a marked shift in the composition of external debt, with private non-guaranteed (PNG) external debt rising relative to traditional public and publicly guaranteed (PPG) debt. This trend, particularly evident in low- and middle-income countries, raises financial stability concerns due to the lack of sovereign guarantees and the potential for contingent fiscal risks. Despite its growing importance, PNG external debt remains under explored in the literature, which has largely focused on PPG debt. Addressing this gap, this study examines the macroeconomic determinants of PNG external debt across 68 low- and middle-income countries from 2000 to 2023. Key explanatory variables include short-term external debt, GDP growth, exchange rate movements, financial development, trade openness, remittances, and foreign reserves. Using panel data from the World Bank and other global sources, the study employs Driscoll–Kraay standard errors, Feasible Generalized Least Squares (FGLS), and system GMM estimators to correct for heteroscedasticity, serial correlation, endogeneity, and cross-sectional dependence. The findings indicate that short-term debt, economic growth, exchange rate depreciation, and financial development drive PNG debt accumulation, while remittances, trade openness, and foreign reserves reduce it. The study provides timely insights for policymakers on managing private external liabilities within broader macro-financial frameworks.

Jel Classification: F24, F31, F34, F41, F63

Keywords

PNG External debt, Generalized Method of Moments, Driscoll Krray Standard Error, Low and Middle Income Countries.