Local Debt Expansion... Vulnerability Reduction? An Assessment for Six Crises-Prone Countries

. During the last years, public debt has been reduced and its composition has been evolving toward domestic currency denominated in most emerging markets. This is a remarkable progress in terms of financial vulnerability, which has been underpinned by the favourable financing conditions and the related deepening of local debt markets. In this paper, we assess the vulnerability reduction-conveyed in the ratio of total debt to GDP-achieved in the last years for six selected emerging economies, focusing on the importance of exchange rate evolution relative to the proactive policies of fiscal authorities have implemented to reduce the external exposure of debt. We first disentangle both components in the current structure of debt to show that proactive debt management has been the dominant factor in the reduction of the forex debt share; then, a stress test within a debt sustainability analysis framework is performed. The results show that proactive debt management policies have reduced the vulnerability of debt in the case of financial turbulence, although, paradoxically, it has also limited the effective reduction in the debt ratio derived from the observed real exchange rate appreciation.