The impact of the COVID-19 pandemic on sovereign debt default risk

Abstract

This paper investigates the impact of the COVID-19 pandemic on sovereign debt default risk using traditional and machine learning models. To reduce the pandemic’s impact and recover the economy, many governments implement loose fiscal and monetary policies, which leads to a dramatic growth in worldwide debts, further increasing sovereign debt default risks. Therefore, we construct a comprehensive framework to explore the pandemic’s impact on sovereign debt defaults. First, we compare the results of traditional models and the Random Forest model, and find that the Random Forest model performs the best. Then, we evaluate the importance of influencing factors, and analyze the pandemic’s impact on sovereign debt defaults. We find that the COVID-19 pandemic decreases the debt repayment capacities of developing economies, especially for countries with precarious fiscal positions and inadequate international reserves. Conversely, for developed economies with sustained macroeconomic despondency and high debt burdens, the pandemic may increase sovereign debt arrears. Finally, we predict the global sovereign debt defaults in 2021. This paper provides in-depth insights into the risk management of sovereign debt default.