Local Government Borrowing Capacity: Legislative versus Market Approach in Slovenia, Croatia, and Serbia

Keywords: borrowing capacity, legislative approach, market approach, local government

Abstract

In this article, we develop a new conceptual model for estimating local government borrowing capacity that combines a legislative and market approach. The model has wider applicability and is relevant for several stakeholders: for the local governments to determine their development financing potential, for the central government to balance local development needs with macroeconomic stability objectives, and for financial institutions and project, developers to tailor their products to the local financing and investment opportunities. We apply the model on selected local government units in Slovenia, Croatia and Serbia and test the hypothesis that their relative (per capita) borrowing capacities differ. We find that the legislative borrowing capacity is more restrictive in Slovenia, while market limitations cap the borrowing capacity in Croatia and Serbia. Overall, Slovenian local government units have the highest relative (per capita) market borrowing capacity, followed by local government units in Croatia and Serbia. We also find evidence that market sentiment may be prohibitive for the borrowing of some units. Our results additionally indicate substantial unused local borrowing capacities in the analysed local government units.

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Published
2020-01-26
Section
Article