**We then use the coefficients from Equations (4) and (3) respectively, to estimate the new PCA infrastructure index given the additional BRI-investment and its marginal impact to growth.**<sup>33</sup> As done with the LTGM, we add the marginal impact of growth to WEO projections. Estimates of GMM marginal impact of growth are reported in Annex V.

# V. Assessing Debt Vulnerability in BRI Recipient Countries

This section uses the estimated BRI debt financing defined in Section II and the marginal growth estimates from Section IV to identify BRI-recipient countries that may not be able to maintain a stable debt-to-GDP ratio because of insufficient growth given their current fiscal policy stance. The analysis uses WEO data as published in October 2018. Given limited publicly available information around BRI financing and the comprehensive data base developed for this paper, WEO projections are likely to include some but not complete information related to BRI. The paper therefore computes debt ratios under two extreme assumptions related to the amount of financing, investment and growth that are included in the 5-year projection period 2019-2023 of the WEO:

- Assumption 1 ( _A1_ ): under this assumption WEO projections for the period 2019-2023 fully include all information related to BRI financing in the projected PPG debt, nominal GDP and primary balance;

- Assumption 2 ( _A2_ ): under this assumption WEO projections do not include any information related to BRI financing in the projections of PPG debt, nominal GDP and Primary Balance.

We estimate for each country a growth and a fiscal gap, under both assumptions. The _growth gap_ is defined as the difference on the debt-to-GDP ratio between excluding and including the impact of BRI investment. The growth gap indicates the countries where BRI investments are projected to generate enough growth to repay themselves and the ones where this is not the case. The _fiscal gap_ is defined as the difference between the average past primary balance and the primary balance needed to stabilize the PPG debt-to-GDP ratio at 2016, factoring in the additional debt and growth resulting from BRI investments. The fiscal gap assesses the amount of effort a country needs to make to keep a constant debt-to-GDP ratio when BRI investments are made. Countries with positive growth and fiscal gaps could face ever increasing debt ratios, absent higher growth or fiscal adjustment.

WEO projections are used as baseline for medium-term debt dynamics, to signal risks that countries may experience from increasing debt ratios. WEO projections are based on a consistent macroeconomic framework, which reflects current policies and outcomes of reforms on the future five years, and also assume that countries trends towards their domestic and external equilibrium.

## _<u>Growth gap</u>_

The growth gap provides an estimate of whether the additional growth due to BRI investment is sufficient to offset the impact of BRI-related borrowing on the debt-to-GDP ratio. The growth gap is defined as the

> 33 The PCA infrastructure index at time _t_ builds-up on previous the index at time _t-1_ given the additional BRIinvestment without considering any depreciation. On the contrary, LTGM includes depreciation in the stock of public capital and this could result lower growth estimates than those in GMM.

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