The impact of natural disasters on external debt and FDI in the developing economies

In recent decades, developing countries have faced an increase in natural disasters, resulting in substantial economic loss. This study investigates the effects of natural disasters on two key macroeconomic indicators: external debt and foreign direct investment (FDI). Using a balanced panel dataset of 75 developing countries from 2000 to 2022, we apply a two-stage system generalized method of moments (Sys-GMM) approach alongside three static models to account for potential heterogeneity. Our findings show that natural disasters significantly increase external debt, while adversely affecting FDI. Moreover, the interaction between natural disasters and trade has a dual impact, exerting a negative effect on external debt, but a positive influence on FDI inflows. To address temporal dynamics, we analyzed five lags of natural disasters and found external debt increases persist for 5 years. These findings suggest policymakers should strengthen sovereign risk financing and climate-resilient infrastructure to protect macroeconomic stability.