Assessing sovereign debt default by efficiency

Since an external debt constitutes a high share in developing country's GDP its efficient use affects the national output production. This study evaluates the feasibility of technical efficiency to be used as an ex-ante predictor of debt default risk assessment. We present evidence that improvement in production efficiency derived from traditional data envelopment analysis (DEA) have positive partial effects in reducing the financial failure for 65 developing countries. In addition, we found that US Fed interest rates play a significant role in increasing the default likelihood. The probability models display a reasonable ex-post prediction accuracy of actual defaults which is around 78%. Overall, results suggest that DEA efficiency metrics could serve as candidate variables for forecasting sovereign debt risk.