Explicit vs implicit government liabilities (2012)

Implicit debt is the promise of future payments by the government. Future pension and health spending typically represent the lion’s share of such debt. Taking into account implicit debt (after appropriate discounting and before taking into account social-security receipts) can offer an interesting perspective in terms of long-term government solvency. If implicit debt is added to the present stock of debt, the US rather than Japan is the country with the largest debt burden. Not surprisingly, the emerging economies carry smaller implicit debt due to (generally) better demographics and/ or (generally) less generous social- and health-care regimes. The latter matters greatly, as the comparison of the US, an advanced economy with relatively favourable demographics, and Japan and Germany suggests. Some caveats are in order. First, the figures for explicit debt refer to gross government debt. Net government debt and net public sector debt, let alone a net worth paint a more favourable picture for virtually all countries. The Russian government, for instance, is a net creditor thanks to savings in its oil stabilisation and national welfare fund. If the broader public sector and/ or the holdings of equity holdings and non-financial assets are taken into account, the picture often changes even more dramatically. India, whose explicitly debt burden is quite high, holds 20% of GDP worth of equity in stock-market-listed partially government-owned companies. Third, in addition to implicit liabilities, there are so-called contingent liabilities (e.g. bank bail-outs, wars). Last but not least, the NPV value of age-related spending increases is quite sensitive to the underlying assumptions in terms of demographic trends, economic growth and discount rates. In spite of these caveats, it is worth recalling that a narrow focus on gross (or even net) debt to ascertain long-term debt sustainability is insufficient.

Source: IMF

Economic development, demographic changes and migration prospects in the Americas (2012)

The US population stands at 310 million. The total population of Latin America is almost 600 million, and of the Caribbean Islands 40 million. Latin America and the Caribbean are demographically much ‘younger’ than the US. The median age of the larger LatAm countries is rising rapidly and will be as high as, or even surpass, the US population by 2050, which is projected to reach 400 million. By 2100, the US population will have risen to 480 million, while the populations of the LatAm-5 (Argentina, Mexico, Venezuela, Brazil and Columbia) will start to decline sometime after 2050. 

These are projections, not forecasts. If these projections materialize, though, the necessary economic and financial adjustment in the major LatAm economies may well need to be more dramatic over the coming decades than in the US. It is worth noting the significant differences in terms of per capita income. US per capita income is USD 48,000 which is significantly higher than in Argentina (USD 17,500), Mexico (USD 14,600), Venezuela (USD 12,600), Brazil (USD 11,800) and Colombia (USD 10,300). While this suggests that the LatAm economies will enjoy significant ‘catch up’ growth potential, their lower levels of per capita income combined with tangible demographic change will create medium-to-long-term economic-financial challenges.         

             

Last but not least, it is tempting to venture a guess concerning future migration patterns. LatAm’s population of 15-24 year olds is peaking. Combined with rising per capita incomes in much of LatAm, this will likely lead to lower migration to the US and Canada. Migration dynamics have been rather interesting in recent years. Anecdotal evidence shows that quite a few Brazilians returned from the US to Brazil to take advantage of the country’s improved economic growth outlook and to escape poor US labor market conditions, where unemployment remains high and/or wages stagnant. 

Source: UN

With Mexico gaining competitiveness vis-à-vis China, it is set for improved economic growth over the next decade or so, especially if the new PRI government pushes forward with structural reform. Pew Research suggests that net migration from Mexico to the US has been zero, and perhaps even negative in the past five to seven years. Some of this is no doubt the result of less-than-stellar economic US conditions and an improving economic situation in Mexico. Significant, underlying demographic changes, such a declining youth bulge and rising per capita incomes in much of LatAm, are also important contributing factors.