The Impact of Macroeconomic Indicators and External Shocks on Government Debt Dynamics in Selected ASEAN Countries

Zuriyati Ahmad, Noorhayati Yusof Ali, Roseziahazni Abdul Ghani

Abstract


In many developing economies, the government’s borrowing is a preferred alternative to other forms of financing, especially when governments require large sums to fund infrastructure and social programs. This reliance on debt financing, however, can
lead to rising public debt levels, particularly if corresponding improvements do not match the borrowing in terms of economic productivity or revenue generation. Over time, this
may pose challenges to fiscal sustainability, increase debt servicing burdens, and reduce the government's ability to respond flexibly to future economic shocks. Therefore, this study examines the impact of macroeconomic indicators and determinants of government
debt in selected ASEAN countries. Using panel data from eight (8) ASEAN countries for 20 years, this paper employs the Random Effects Model (REM) to assess the relationship between these variables and government debt. The findings reveal that GDP
growth has a significant impact on reducing debt levels. At the same time, FDI reveals a significantly positive relationship which increases debt. Government expenditure and lagged Government Debt exhibit a statistically positive relationship with Government
Debt. Nonetheless, neither inflation nor crisis episodes has a statistically significant impact on debt. The results suggest that economic growth and tailored fiscal strategies
are key to maintaining sustainable debt levels.

Keywords: Government Debt, Macroeconomic Indicators, External Shocks, COVID19, Panel Data

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