Natural Resources and Sovereign Risk in Emerging Economies: A Curse and a Blessing

RePEc Short ID: pre260
ORCID iD: 0000-0002-1481-051X

Hamann, Franz; Mendez-Vizcaino, Juan Camilo; Mendoza, Enrique G.; Restrepo-Echavarria, Paulina

doi:10.20955/wp.2018.032

Working Paper Revision

Natural Resources and Sovereign Risk in Emerging Economies: A Curse and a Blessing

Abstract: Emerging economies that are large oil producers have sizable external debt, their country risk rises when oil prices fall, and several of them have defaulted at least once since 1979. Moreover, while oil and non-oil output reduce country risk on impact and in the long-run, oil reserves reduce it marginally on impact but increase it in the long-run. We propose a model of sovereign default and oil extraction consistent with these observations. The sovereign manages oil reserves strategically to make default less painful by altering the value of autarky, and hence its sustainable debt falls. All else equal, default is less likely in states in which reserves or oil prices are higher, or non-oil GDP is lower, but the equilibrium dynamics of reserves and country risk in response to oil-price shocks switch from negatively correlated on impact to positively correlated for several years.

JEL Classification: F34;

https://doi.org/10.20955/wp.2018.032