Sustainability of external debt in emerging market economies: An analysis for the 1981-2021 period using structural break, quantile and panel unit root tests

The main objective of this thesis is to examine the external debt sustainability of Turkey, Brazil, China, Colombia, Egypt, India, Philippines, Indonesia, Mexico and Peru during the period 1981-2021, by highlighting how the domestic saavings gap, high public expenditures, trade deficits and demand for foreign currency increase external borrowing in underdeveloped and developing countries. For this purpose, the study tests various assumptions using panel unit root tests and structural break tests. Firstly, a horizontal cross- sectional dependence analysis was conducted using panel unit root tests, and the presence of correlation between the variables was detected. In this context, the stationarity of the variables was tested usingg the Levin, Lin and Chu (LLC), Harris Tzavalis (HT), CIPS and PANICCA tests. The findings show that the external debt stock is sustainable but permanent shocks in certain variables, such as the ratio of debt service to GDP, threaten the of external debt. To conduct more detailed country-specific analyses, the response of external debt indicators to permanent and temporary shocks was examined using structural break and Kantil unit root tests. The structural break tests showed that external debt is sustainable for Turkey, China, the Philippines, Indonesia, Mexico, Egypt, and Peru, while unsustainable results were found for Brazil, Colombia, and India. For example, in Turkey, during the period with the lowest external debt stock-to-GDP ratio, the shocks were found to be temporary, while in other periods, the shocks were permanent, thus indicating unsustainability. The econometric analysis results suggest that external debt sustainability in the selected emerging market economies is subject to different effects in different periods, offering significant insights for policymakers. Measures such as fiscal discipline and budget management, financial reforms, and attracting foreign investors are crucial for sustainable debt management.