Debt growing at alarming speed
The Bank for International Settlements (BIS), a central bank of central banks based in Switzerland, is a reputable source of primary data. In its September quarterly report, in which it published results from its newly minted database on credit, it shows that countries have accumulated substantial debt and continue to struggle to deleverage.
Given the growing need to monitor debt following the 2008 global financial crisis and the differences in government debt statistics produced elsewhere, the BIS has developed a database that will allow quarterly monitoring of debt, as opposed to the annual publication from other sources, such as the International Monetary Fund. In addition, the consistency in data-collection methodology across countries within the ambit of the BIS makes comparisons between countries simpler.
Governments worldwide adopted a Keynesian response to the global financial crisis through expansion of government expenditure, which has caused government debt levels to soar. Countries hardest hit in the developed world saw fiscal deficits increase and gross domestic product (GDP) stall. This led to a prolonged expansion of government debt-to-GDP ratios well above their historic means. On aggregate, for developed economies, debt-to-GDP ratios have increased from 50% of GDP to 90%.
Despite the huge Keynesian response, aggregate demand globally remains subdued, with potential risks down the line emanating from these rapidly increasing debt balances.
A similar picture was seen in the emerging world. For Brazil, Russia, India, China and SA (Brics), on average, debt levels bottomed out at about 40% of GDP before escalating to 50% currently. Although widely accepted as a plausible framework for grouping these countries, differences remain and analysis of debt on an aggregated Brics basis masks a lot of detail.
The response to the crisis of the five Brics countries has differed. China, with its large savings pool and deep pockets of capital stashed in foreign exchange reserves ($3.8-trillion) and sovereign wealth funds (it has five with a total value of $1.7-trillion), has added moderately to its government debt balances. Since the fourth quarter of 2007, at the height of the subprime debt crisis in the US that preceded the Lehman Brothers’ collapse, China has grown its government debt by only 4% of GDP. In contrast, India, which had a large debt stock heading into the crisis (73% of GDP), has been on a path to reduce its debt as it could have proved unsustainable — it has managed to reduce debt by 7% of GDP.
Wounded by the traumatising effect of the 1998 debt default, Russia has maintained a prudent approach to its government debt. Since then, it has reduced the level from more than 100% of GDP to the current 17%. The fiscal space created by this prudence allowed the Kremlin to expand debt levels by 8% of GDP in response to the crisis. The current economic crisis, induced by an oil price that has more than halved in value, has resulted in some enlargement of debt. During the fourth quarter of last year, debt increased to 18% of GDP from 14.1%. Russia’s debt levels, however, remain relatively low.
Brazil, on the other hand, gradually increased debt by 4% of GDP, now at 67%, from an already heady 63% before the crisis. Sustainability of debt had become an issue for Brazil, which has been sent into a deep recession and increasing fiscal deficits. It is not surprising to see its credit rating downgraded to noninvestment grade by Standard & Poor’s due mainly to the perceived political unwillingness to implement an austere fiscal policy. GDP in Brazil contracted by 7.2% and 3% in the first and second quarter of this year, respectively, placing it firmly in recession.
The most disturbing data compiled by the BIS concerns SA. The figures show that, since 2007, SA has accumulated the most debt as a percentage of GDP of the 14 emerging market countries it monitors. A staggering 23% of GDP in government debt was acquired between the fourth quarters of 2007 and last year. This means SA has become the most aggressive debt accumulator of countries in the emerging world by a significant margin.
My engagement with the Treasury confirms there could be differences in how the BIS compiled its data, which resulted in a higher government debt-GDP ratio of 55% (the official number is 47%). Accounting differences aside, the pace of SA’s debt accumulation is uncomfortable. Following a sharp decline in debt levels from 1994, when government debt bottomed at about 30% of GDP, the current climb is concerning.
As experienced in our personal lives, the only way to cut debt to sustainable levels is to earn more money or stop spending and pay it down. In the same way, for a government to reduce debt, it needs to earn a higher national income (faster growth) or stop spending. The difficult issue with debt is that if one does not have the money (greater GDP and tax revenue), it is almost impossible to pay it down without a long and arduous effort to stop spending and live within one’s means.
The low-growth situation in SA, coupled with the elaborate planned expenditure, indicates the country should begin a process to live within its means. It appears the country cannot grow itself out of the debt situation. Although the National Development Plan aims for annual economic growth closer to the desired 5%, the constructs of the economy and related global forces suggest this percentage is unattainable. The main question regarding tomorrow’s medium-term budget policy statement is: "What are the plans to tackle the potentially unsustainable debt path SA is on?"
Having said that, debt is not always bad. People and governments can borrow funds to invest in businesses and infrastructure, which can lead to growth and improve productivity, allowing debt to be easily paid back and future generations to benefit from the investments.
The Treasury has previously made clear its intention to consolidate government expenditure and control the soaring wage bill. Although additional tax increases cannot be ruled out as a means of increasing revenue, as discussed by the Davis Tax Committee, they would be counterproductive at this stage of the economic slowdown.
With low interest rates and the ability to borrow cheaply, incurring debt is a tempting and easy way to raise funds to sustain lofty expenditure.
One hopes Finance Minister Nhlanhla Nene will provide feedback on how the acquisition of new debt is to be controlled.
The best way to reduce debt is to bolster economic growth so that borrowings can be paid down, as was the case during the period after 1994. Admittedly, local and global conditions were materially different at that time, but the test is in how growth is going to be put back at the centre of current policy construction.
Source: BusinessDay Live