Public Investment Quality and its Implications for Sovereign Risk and Debt Sustainability

Abstract:
This paper introduces a novel index to measure public investment quality, utilizing the World Bank’s investment project performance data from 120 countries over the period 2000-2021. After detailing the construction of the index, the paper examines how public investment quality influences the relationship between the level of public investment and sovereign risk. We find that high levels of public investment are linked to lower sovereign risk in countries with high investment quality, and conversely, to higher sovereign risk in countries with low investment quality. This relationship is especially pronounced in sub-investment grade countries. We corroborate these results by showing that when public investment quality is high, scaling up public investment enhances fiscal sustainability by reducing the debt-to-GDP ratio in the long run: high-quality public investment is self-financing. However, the opposite is true when public investment quality is low, where increased public investment results in a deterioration of fiscal fundamentals.

About Spreaker:
Ugo Panizza is Professor of Economics and Pictet Chair in Finance and Development at the Geneva Graduate Institute where he also serves as head of the Department of Economics. He is a Vice President and Fellow of CEPR and Fellow of the Fondazione Einaudi, Director of the International Center for Monetary and Banking Studies, Editor in Chief of Oxford Open Economics, and deputy director of the Center for Finance and Development. Before joining the Graduate Institute, he was Chief of the Debt and Finance Analysis Unit at the United Nations Conference on Trade and Development (UNCTAD) and a Senior Economist at the Inter-American Development Bank. He also worked at the World Bank and taught at the American University of Beirut and the University of Torino. He holds a PhD in Economics from the Johns Hopkins University and a Laurea in Political Sciences from the University of Torino.