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Working Paper
Natural Resources and Sovereign Risk in Emerging Economies: A Curse and a Blessing
Emerging economies that are large oil producers have sizable external debt, their sovereign risk rises when oil prices fall, and many of them have defaulted in the past. Interestingly, oil output reduces country risk on impact and in the long-run,but oil reserves increase it in the long-run and reduce it only marginally on impact. We propose a model of sovereign default and oil extraction and derive analytic and quantitative findings consistent with these observations. The sovereign manages oil reserves strategically to make default less painful, and hence its sustainable debt falls. Reserves ...