Constructing Country‐Specific Debt Indices for Developing Countries

ABSTRACT Contemporary crises continue to keep governments in protracted periods of borrowing, increasing the stock and flow of sovereign indebtedness. Especially for developing economies and small states, singular metrics of public debt such as the debt‐to‐GDP ratio may not reflect the country's true debt position. We consolidate various indicators of public debt to construct a novel composite debt index and its companion debt volatility index. We demonstrate our approach, based on principal component analysis, using a natural resource‐rich but relatively data‐poor country, Trinidad and Tobago, where debt management is a recurring macroeconomic concern, but comprehensive debt indices remain unavailable. The movements in our indices align with historical episodes that would influence country‐specific public debt levels. Our approach is straightforward to adapt and apply to developing countries, where a uniform measure of debt is either unavailable or provides an incomplete perspective of fiscal stress when such a measure exists. We further illustrate the usefulness of the constructed indices by investigating the debt‐growth nexus. Consistent with several empirical studies, our novel debt indices for this country provide evidence of a negative, significant, and robust impact of debt on growth when the traditional debt‐to‐GDP measure suggests none.