The role of fiscal stress indicators on the determination of public sector risks during fiscal crisis

Fiscal stability and sustainability become more difficult during the fiscal crisis periods. Therefore, fiscal crisis prediction and fiscal sustainability are important for avoiding economic crisis in a country. Fiscal stress index has been used for the prediction of fiscal crisis and identification of leading indicators in recent years. This study aims to analyse depending on which indicators fiscal crises will be investigated via the method of fiscal stress. Episodes of fiscal distress have become the main problem in developed and developing countries especially after the global crisis which emerged in the new millenium. Therefore, measuring fiscal sustainability risks of countries has gained more importance. For this purpose in our study, fiscal sustainability and debt management are chosen as the main variables for the prediction of fiscal crisis events. Furthermore, statistically significant variables among the other fiscal variables are preferred. Fiscal stress index is computed for thirty developing counteries between the years 2000-2013 by using yearly data and employing logit model. Our results reveal the most significant variables are as follows. If the ratio of general government gross debt to GDP is dependent variable, then the most significant variables are the ratio of general government gross debt to GDP, ratio of total reserves to total external debt, ratio of age dependency to working-age population, ratio of external debt service to external debt stock, lending interest rate. If the ratio of general government net lending / borrowing is dependent variable, then the most significant variables are budget deficit and cash deficit rate. Therefore fiscal indicators can be prefered as a indicator for prediction of crises. Keywords: Fiscal crisis, early warnings systems, fiscal stress index, fiscal sustainability, logit model.