Does Fiscal Consolidation Affect Non-Performing Loans? Global Evidence from Heavily Indebted Countries (HICs)

Article

Rahman, Habib Ur, Arian, Adam and Sands, John. 2023. "Does Fiscal Consolidation Affect Non-Performing Loans? Global Evidence from Heavily Indebted Countries (HICs)." Journal of Risk and Financial Management. 16 (9). https://doi.org/10.3390/jrfm16090417
Article Title

Does Fiscal Consolidation Affect Non-Performing Loans? Global Evidence from Heavily Indebted Countries (HICs)

ERA Journal ID213440
Article CategoryArticle
AuthorsRahman, Habib Ur, Arian, Adam and Sands, John
Journal TitleJournal of Risk and Financial Management
Journal Citation16 (9)
Article Number417
Number of Pages15
Year2023
PublisherMDPI AG
Place of PublicationSwitzerland
ISSN1911-8066
1911-8074
Digital Object Identifier (DOI)https://doi.org/10.3390/jrfm16090417
AbstractThis study explores fiscal consolidations’ impact on non-performing loans (NPLs) in highly indebted countries (HICs) following the global financial crisis (GFC) and subsequent sovereign debt crisis. A dynamic panel data estimator was applied to obtain the unbiased estimator due to NPLs’ time persistence. The findings reveal that fiscal consolidation measures increase NPLs since they limit the household and business loan-serving capacity. Extended analysis categorises fiscal consolidation episodes into (1) the fiscal consolidation weak form (FCWE) and (2) the fiscal consolidation strong form (FCSE). The extended analysis results reveal that the FCWE and FCSE improve NPLs by 1.55% and 31.10%, respectively. The weak-to-strong form transition of the fiscal consolidation analysis resulted in improving NPLs by 28.55 percentage points. NPL definition challenges, the potential influence of loan restructuring and regulatory restrictions, and implications for policymakers and financial institutions in managing NPLs in highly indebted economies were explored. Investigating the potentially different effects of both forms of fiscal consolidation (FCWE and FCSE) on NPLs in countries with different definitions of NPLs, including a comparison study between different definitions, was identified as an implication for future research. Finally, future studies should examine how restrictions on IFRS 9 may affect the FCWE and NPL as well as FCSE and NPL associations. © 2023 by the authors.
Keywordsfiscal consolidation; non-performing loans; highly indebted countries; global financial crisis; sovereign debt cri
ANZSRC Field of Research 2020350202. Finance
Byline AffiliationsHolmes Institute
School of Business
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