Leading indicators of debt pressure: a South African application

Abstract

Abstract As South Africa’s national debt has been on a steady upward trend since the late 2000s, this paper aims to construct an Early Warning System (EWS) using logit regressions to predict the likelihood of future public sector and private sector debt pressure. Results show that real GDP growth and the exchange rate matter for the prediction of private sector debt pressure. Government expenditure and real GDP growth are the most important predictors of public sector debt pressure. The implication of the net substantive magnitude of leading indicator impacts is that private debt pressure is principally structural, and public debt pressure is a reflection of discretionary policy choices. Early warnings from all four model predictions satisfy statistical reliability criteria. The best performing model is the public sector model for excessive debt accelerations, capturing 61.54% of the actual high-pressure events with a precision of 72.73%.