Page 1 of 15
Advances in Social Sciences Research Journal – Vol. 8, No. 5
Publication Date: May 25, 2021
DOI:10.14738/assrj.85.10229.
Özker, A. N. (2021). Sensitivity of Debt Flows to Fiscal External Shocks in Emerging Market and Capital Market Correlations.
Advances in Social Sciences Research Journal, 8(5). 157-171.
Services for Science and Education – United Kingdom
Sensitivity of Debt Flows to Fiscal External Shocks in Emerging
Market and Capital Market Correlations
Prof. Dr. Ahmet Niyazi ÖZKER
Bandirma Onyedi Eylul University
Faculty of Economics and Administrative Sciences
Public Finance Department 10200-TURKEY
ORCID ID: 0000-0001-5313-246X
ABSTRACT
In this study, we attempted to reveal the reasons for possible debt changes
regarding the sensitivity of capital change indices in emerging economies to global
financial risks and the meaning of possible correlation effects at the global level.
Overcoming to Global economic and financial instabilities in emerging economies
have required to take different fiscal measure have been aimed at balancing the
rising interest rates and global financial change costs, which are caused by rising
global priority costs. The external effects of global financial shocks in emerging
economies led to a significant increase in global borrowing in these economies. In
other words, in these countries representing emerging economies at different
levels of development, they have also provided a reason for the inclusion of
different financial and monetary policies in the process. Sensitivity to global
financial shocks in emerging economies is related to the structural characteristics
of countries and structural impact scales and correlations regarding which markets
are affected by the needs. In this respect, it appears that the developments
regarding the sectors, especially the capital flow, are meaningful in terms of indexes
created by the periodic changes in the values of the current change. In this respect,
in emerging economies, these shocks mostly emerge with effects giving different
correlation results in countries that differ according to global crises and have other
capital accumulations. The remarkable point in terms of the correlations
determined here is that debt ratios and capital accumulation variations in emerging
economies have put forth a significant correlation in a period of global financial
shocks.
Key Words: Capital Inflows; Debt Flows; Emerging Markets; Fiscal External Shocks;
Policy Interest Rates.
INTRODUCTION
Debt accumulation in countries representing emerging economies emerges as an essential
phenomenon triggered by financial shocks and financial crisis factors globally. In emerging
economies, it put forth that the sensitivities regarding increasing debt limits generally increase
during financial crisis periods, and this phenomenon creates some significant deviations
regarding production, investment, and consumption [1]. In this context, it appears that the debt
accumulation that grows faster after global financial changes and critical financial fragility
phenomena that increase the possibility of countries falling into a crisis have come to the fore.
Page 2 of 15
158
Advances in Social Sciences Research Journal (ASSRJ) Vol. 8, Issue 5, May-2021
Services for Science and Education – United Kingdom
On the other hand, the costs of high debt services are accepted as an important reason for
financial fragility in countries representing emerging economies [2]. Besides, it is understood
that inadequate sectoral fiscal and monetary sector policies in the crisis period in emerging
economies have suffered significantly and have not created the desired level of impact in recent
years. It appears that financial regulations and comprehensive financial management in
emerging economies bring sustainability to the process in the most reliable way, bringing
meaningful protective policies to the global financial environment. In addition, it is accepted
that the sustainability of financial-political stability and the efficiency of exchange rate regimes
in ensuring macroeconomic stability also creates a positive, meaningful effect level in
preventing the deviations in GDP ratios in these countries [3]. In this respect, its sensitivity to
external shocks in emerging economies results in different results in countries where
institutional weakness and financial assets differ. In this context, the effectiveness of the public
units such as Public Economic Enterprises, Public-Private Partnerships, General Borrowings,
Secured Lending and other openly authorised Loan Guarantees can express by a different
structural position of the borrowing limits in emerging economies as well as the direct
sensitivity of the said public units to global financial fluctuations [4].
When we look at the debt changes at the global level regarding financial changes, it appears that
the debt levels reached approximately 230% of the GDP as of 2019 at the worldwide level.
Therefore, this expresses that in emerging market economies and developing economies,
especially the public nature of debt ratios come to the fore. Especially in emerging economies,
it is seen that increasing debt limits constitute approximately 170% of the average GDP of
countries representing emerging economies [5]. It can be said that the fastest increase in debt
growth rates at the global level, which is 80 per cent, is in countries representing emerging
economies since 2010 compared to GDP. It is also striking that borrowing and borrowing values
used to finance growth-enhancing investments such as infrastructure and health services and
education services in these countries are higher, especially in emerging economies with
developmental difficulties. Therefore, public financial vacancies have also aimed as the fiscal
policy's main objective to positive affect demand and economic production activities during
economic recession and recession in emerging economies [6]. On the other hand, borrowing,
which refers to the private sector in emerging economies, and financial relations between units
are observed to increase households' debt presentation with resources that can facilitate
companies' investments.
These countries, where increased debt limits made them particularly vulnerable to external
financial shocks, had to act less vulnerable to global financial shocks amidst financial fragility
stresses. On the other hand, these increases in global financing costs had a permanent negative
impact on economic activities. They caused the financial fragility cycle to become a more
frequent financial crisis cycle among emerging economies. Therefore, despite the low accurate
interest rates in the long terms, it is seen that these increases in the current debt ratios are the
values that are likely to cause financial crises in emerging economies. It is becoming clear that
global shocks and fragile economies have created a more critical negative impact mechanism
with the increase in debt limits in recent years and more increased sensitivity to global financial
changes, especially in emerging economies [7]. On the other hand, the rapid borrowing
phenomenon, which depends on its essential characteristics during crisis periods, differs in
countries representing emerging economies. Besides, it appears that the negative features
regarding the correlational connections between the periodic changes in rapid debt
Page 3 of 15
159
Özker, A. N. (2021). Sensitivity of Debt Flows to Fiscal External Shocks in Emerging Market and Capital Market Correlations. Advances in Social
Sciences Research Journal, 8(5). 157-171.
URL: http://dx.doi.org/10.14738/assrj.85.10229
accumulation and possible financial crises related to debt accumulation are prominent
incorporate practices and act in an equivalent-linear process with global financial change
processes.
THE SENSITIVITY DYNAMICS OF DEBT FLOWS TO FISCAL SHOCKS IN EMERGING
MARKET
Analysing the sensitivities against external financial shocks in emerging economies structurally
makes sense primarily with the significant impact level of some macro developments in recent
years. In other words, understanding what structural impact levels have created by structural
dynamics in countries representing emerging economies constitutes a meaningful framework
in terms of expressing these impact dynamics more clearly. It has been observed by the rapid
debt accumulation is on the agenda, and this sensitivity, especially against external financial
shocks, creates a dynamic effect mechanism on a rapid debt accumulation in these countries
[8]. It appears that the sensitivity to external financial shocks in emerging economies has
accelerated, especially during periods of debt accumulation and especially the sensitivity of
three-fourths of emerging economies to financial crises has increased in the last ten years. The
linear relationship between debt accumulation and financial emergencies in debt and financial
problems are associated with macroeconomic and financial vulnerabilities with weak economic
consequences. In times of crisis, it is observed that especially GDP decreased by 6 to 8 per cent
while the percentage of investments decreased by 15 to 20 per cent. These structural dynamics
as related to the increasing debts to the external financial shocks is possible to order with their
some effective features below:
✓ First of all, the frequent emergence of a possible financial crisis on the global level in
emerging economies is on the agenda the primary reason that increases debt sensitivity
against possible external shocks. Besides, it is considered significant that the sum of both
public and private debts has the same effect against the possibility of a foreign exchange
crisis and increases the sensitivity to evaluate the foreign exchange crisis probabilities
in the possible negative category at the global level affecting [9].
✓ On the other hand, the accumulation of public and private sector debt and a rapid
borrowing process has further increased the sensitivity of borrowing to financial shocks,
with the possibility of a high degree of a currency crisis. The effects of financial crises on
the increases in global interest rates and the negative effects of financial shocks have
more affected some countries negatively in emerging economies with high external debt,
especially in terms of international reserves in terms of short-term debts. This negativity
increased the foreign borrowing demands of these countries based on higher foreign
borrowing policies, and the sensitivity of possible borrowing limits against their
external debt, as a structural dynamic negatively affected [10].
✓ Another critical reason that increases these countries sensitivity against global financial
shocks in emerging economies is the inefficient use of debts in these countries. The use
of public debt in import substitution policies, especially in countries such as Argentina,
Brazil and Venezuela, has created an important debt dynamic based on expansionary
macroeconomic policies. This situation, which caused a demand boom, primarily due to
domestic debt, took place as a debt period that made manufacturing investments more
inefficient by raising the private sector debt limits [11].
✓ The meaningful another effective dynamic in the concerned process is the inadequate
financial management process. It has been observed that the risky debt composition of
these countries representing emerging economies has increased in the period when