Stochastic Debt Sustainability Analysis in Romania in the Context of the War in Ukraine

Abstract

Public debt is determined by borrowings undertaken by a government to finance its short- or long-term financial needs and to ensure that macroeconomic objectives are met within budgetary constraints. In Romania, public debt has been on an upward trajectory, a trend that has been further exacerbated in recent years by the COVID-19 pandemic. Additionally, a significant non-economic event influencing Romania’s public debt is the war in Ukraine. To analyze this, a stochastic debt sustainability analysis was conducted, incorporating the unique characteristics of Romania’s emerging market into the research methodology. The projections focused on achieving satisfactory results by following two lines of research. The first direction involved developing four scenarios to assess the risks presented by macroeconomic shocks. Particular emphasis was placed on an unusual negative shock, specifically the war in Ukraine, with forecasts indicating that the debt-to-GDP ratio could reach 102% by 2026. However, if policymakers implement discretionary measures, this level could be contained below 88%. The second direction of research aimed to establish the maximum safe limit of public debt for Romania, which was determined to be 70%. This threshold would allow the emerging economy to manage a reasonable level of risk without requiring excessive fiscal efforts to maintain long-term stability.

Keywords

• public debt
• fan chart
• snowball effect
• System GMM
• VAR model