IMF Standardised Stress Tests — dk_stress

Applies six standardised IMF stress-test scenarios to a baseline debt projection using the debt dynamics equation:

Usage

dk_stress_test(
  debt,
  interest_rate,
  gdp_growth,
  primary_balance,
  horizon = 5,
  growth_shock = -0.01,
  interest_shock = 0.02,
  exchange_shock = 0.15,
  fx_share = 0,
  pb_shock = -0.01,
  contingent_shock = 0.1,
  calibrate = NULL
)

Arguments

debt: Numeric scalar. Initial debt-to-GDP ratio.
interest_rate: Numeric scalar or vector of length horizon. Baseline nominal effective interest rate.
gdp_growth: Numeric scalar or vector of length horizon. Baseline nominal GDP growth rate.
primary_balance: Numeric scalar or vector of length horizon. Baseline primary balance as a share of GDP (positive = surplus).
horizon: Integer scalar. Projection horizon in years. Default 5.
growth_shock: Numeric scalar. Percentage-point reduction in GDP growth applied in the first two years. Default -0.01 (1 pp lower growth).
interest_shock: Numeric scalar. Percentage-point increase in the interest rate. Default 0.02 (200 basis points).
exchange_shock: Numeric scalar. Depreciation fraction applied to foreign-currency debt. Default 0.15 (15 per cent depreciation).
fx_share: Numeric scalar. Share of debt denominated in foreign currency. Default 0.
pb_shock: Numeric scalar. Percentage-point deterioration in primary balance in the first two years. Default -0.01.
contingent_shock: Numeric scalar. One-off increase in debt-to-GDP from contingent liabilities materialising. Default 0.10.
calibrate: Optional named list for data-driven shock calibration. Should contain numeric vectors gdp_growth_hist, interest_rate_hist, and primary_balance_hist. When provided, shock sizes are computed as one standard deviation of each historical series, replacing the fixed defaults. When NULL (default), the fixed defaults are used.

Value

An S3 object of class dk_stress containing:

scenarios: A data.frame with columns year, baseline, growth, interest_rate, exchange_rate, primary_balance, combined, and contingent.
terminal: Named numeric vector of terminal debt-to-GDP under each scenario.
inputs: A list storing all input parameters.

Details

$$d_{t+1} = \frac{1 + r_t}{1 + g_t} d_t - pb_t + sfa_t$$

The six scenarios are:

Growth shock: GDP growth reduced by growth_shock for the first two years.
Interest rate shock: interest rate increased by interest_shock for the full horizon.
Exchange rate shock: debt increases by debt * fx_share * exchange_shock in year 1 (one-off stock-flow adjustment from currency depreciation).
Primary balance shock: primary balance reduced by pb_shock for the first two years.
Combined shock: simultaneous growth shock of growth_shock / 2 and interest rate shock of interest_shock / 2.
Contingent liabilities: one-off debt increase of contingent_shock in year 1.

References

International Monetary Fund (2013). Staff Guidance Note for Public Debt Sustainability Analysis in Market-Access Countries. IMF Policy Paper.

International Monetary Fund (2022). Staff Guidance Note on the Sovereign Risk and Debt Sustainability Framework for Market Access Countries. IMF Policy Paper.

Examples

st <- dk_stress_test(
  debt = 0.90,
  interest_rate = 0.03,
  gdp_growth = 0.04,
  primary_balance = 0.01,
  fx_share = 0.20
)
st
#> 
#> ── IMF Stress Test Scenarios ───────────────────────────────────────────────────
#> • Horizon: 5 years
#> • Initial debt/GDP: 90%
#> 
#> Terminal debt/GDP by scenario:
#> 
#>  Scenario               Terminal Diff  
#>  Baseline               80.9%    0 pp  
#>  Growth shock           82.5%    1.7 pp
#>  Interest rate shock    89.3%    8.5 pp
#>  Exchange rate shock    83.4%    2.6 pp
#>  Primary balance shock  82.8%    1.9 pp
#>  Combined shock         85.9%    5 pp  
#>  Contingent liabilities 90.5%    9.6 pp
plot(st)