Examining the Debt Servicing Capacity of Belt and Road Initiative’s Developing Countries

Proceedings of ‏The 3rd International Conference on Management, Economics and Finance

Year: 2021

DOI: https://www.doi.org/10.33422/3rd.icmef.2021.02.131

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Examining the Debt Servicing Capacity of Belt and Road Initiative’s Developing Countries

Zahra Thania Atmoko Putri

ABSTRACT: 

As China faces a wave of debt renegotiations on the Belt and Road Initiative, the importance of examining what factors cause the depletion of participant countries’ debt servicing capacity arises. This paper empirically studies the importance of 5 financial indicators in determining the debt servicing capacity of participant developing countries based on the probability of rescheduling. Using logistic regression analysis and more than 500 observations, the reserves to imports ratio is found to be the most important indicator of whether a country would reschedule its debt obligations. Countries are thus encouraged to hold a higher level of international reserves relative to their imports as it will substantially increase their capacity to service debt. Moreover, in a world of rising external debt levels, this finding implies that the same will improve a country’s resilience to shock. As creditors are equally required to maintain debt sustainability, China must increase its debt transparency and provide sound debt management assistance if it wishes its project to proceed to completion.

Keywords: Belt and Road Initiative, debt servicing capacity, developing countries.