Government Debt Sustainability in ASEAN: The Interplay of Domestic Macroeconomic Factors and External Shocks

Abstract

Government borrowing is frequently the primary means of financing in developing countries. This borrowing is effective in the short term. Nonetheless, heavy reliance on debt financing can escalate government debt levels if not accompanied by improvements in productivity or revenue generation. This situation may challenge fiscal sustainability, increase debt servicing burdens, and constrain the government’s ability to respond to future economic shocks. Therefore, this study aims to explore the sustainability of government debt in selected ASEAN countries by examining the roles of both domestic macroeconomic indicators and external shocks. Using panel data covering eight (8) ASEAN countries over 20 years, the analysis employs the Random Effects Model (REM) to examine the relationship between government debt, macroeconomic performance, and external factors. The results reveal that GDP growth significantly contributes to reducing debt levels, while foreign direct investment (FDI) has positive relationship with higher debt. Both government expenditure and lagged debt also exhibit a statistically significant positive effect on current debt levels. In contrast, neither inflation nor crisis episodes show a significant impact on debt. Overall, the findings underscore that sustained economic growth, coupled with prudent and well-designed fiscal policies, is essential for maintaining sustainable debt levels in ASEAN economies.