Effects of commodity prices and domestic macroeconomic factors on public debt: evidence for Peru and Chile

Fiscal sustainability is usually assessed through the dynamics of public debt, whose main conventional determinants are GDP growth, the exchange rate, the interest rate on public debt, and the primary balance. Additionally, in emerging markets that are commodity exporters, the prices of such commodities significantly influence macroeconomic and fiscal variables. In this regard, the present document shows how Peru and Chile, countries with a high share of the mining sector in their exports, managed to accumulate fiscal surpluses during periods of high copper prices and obtained moderate fiscal deficits during periods of lower prices of this metal, which led them to maintain relatively low levels of public debt among emerging markets. Considering these facts, it is relevant to estimate the effects of domestic determinants and commodity prices on public debt in Peru and Chile. For this purpose, a structural vector autoregression (SVAR) model with an external block is employed, using the framework proposed by Favero and Giavazzi (2007) and quarterly data. The estimates for both countries suggest that public debt reacts differently, in terms of persistence and magnitude, to shocks in domestic determinants, highlighting GDP and primary deficit shocks. Meanwhile, an increase in the nominal exchange rate raises public debt in both countries, although with a greater impact and persistence in Peru, which would be consistent with its higher degree of dollarization. In addition, it is estimated that a 10.0 percent increase in commodity prices reduces public debt in both countries, reaching its lowest level at -1.25 p.p. and -1.40 p.p. of GDP after 10 quarters in Peru and Chile, respectively, and its effects extend for around five years.