Working Paper: NBER ID: w31058
Authors: Franz Hamann; Juan Camilo Mendez-Vizcaino; Enrique G. Mendoza; Paulina Restrepo-Echavarria
Abstract: Emerging economies that are large oil producers have sizable external debt, their country risk rises when oil prices fall, and several of them have defaulted at least once since 1979. Moreover, while oil and non-oil output reduce country risk on impact and in the long-run, oil reserves reduce it marginally on impact but increase it in the long-run. We propose a model of sovereign default and oil extraction consistent with these observations. The sovereign manages oil reserves strategically to make default less painful by altering the value of autarky, and hence its sustainable debt falls. All else equal, default is less likely in states in which reserves or oil prices are higher, or non-oil GDP is lower, but the equilibrium dynamics of reserves and country risk in response to oil-price shocks switch from negatively correlated on impact to positively correlated for several years.
Keywords: Natural Resources; Sovereign Risk; Emerging Economies; Oil Prices; Debt
JEL Codes: F34; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| oil prices (L71) | country risk (F34) |
| oil reserves (L71) | country risk (F34) |
| non-oil GDP (Q43) | country risk (F34) |
| oil production (L71) | country risk (F34) |
| oil prices (L71) | default likelihood (C51) |
| oil reserves (L71) | default likelihood (C51) |
| higher oil production or non-oil GDP (O49) | country risk (F34) |