Government debt in the emerging markets – a comparative view (2013)

Governments in the advanced economies are facing sizeable short-, medium- and long-term debt sustainability challenges. By contrast, government debt in the EM has been trending down due to a combination of solid economic growth, low interest rates and, generally speaking, sustainable fiscal policies. More specifically, gross general government debt is set to remain stable or will decline over the next five years.

If implicit debt (promise to make future payments) is taken into account, a somewhat less straightforward picture begins to emerge. If the implicit debt stemming from the increase in pension- and health-expenditure is taken into account (and adequately discounted), countries like China and Russia, the two countries with the lowest government debt level, begin to compare much less favourably to countries with currently large public debt burdens but limited implicit pension- and healthcare liabilities, such as India.

According to the IMF, the NPV value of spending increases in 2011-50 is in the 100-260% of GDP range for China, Russia, Korea and Turkey, and less than 100% of GDP for India, Mexico, Indonesia, South Africa and Poland. Naturally, this is not meant to suggest that these liabilities will necessarily materialise. Pension and healthcare reforms do take place and fiscal policy can be adjusted to deal with the impending rise in spending and liabilities.

Source: IMF

Historically, emerging markets (EM) have tended to get into financial trouble on account of their FCY debt. In addition to a decline in government debt, the share of FCY debt as a share of total debt has fallen in virtually all EM. At the same time, increased FX reserves have substantially reduced and – in many cases – eliminated potentially risky net sovereign FCY exposure of the public sector. The public sectors of most top-tier EM are net FCY creditors today. In effect, this means that currency depreciation results in a reduction of net public debt. Many EM have replaced FCY debt owed to foreigners with LCY debt owed to foreigners. While fiscal deficits are quite small, generally less than 3% of GDP (with the significant exception of India), and consistent with stable-to-declining debt-to-GDP ratios over the medium term, gross financing requirements remain large, at least by EM standards. In 2013, they will range from 17% of GDP in Brazil to basically zero in Korea. 

Both gross and net financing requirements have generally been declining, or at least they have not been increasing, in recent years. In many cases, the maturity structure of domestic debt has improved. Government refinancing risks are quite manageable, not least because medium-term debt sustainability and credit risk is generally not an issue. Importantly, non-resident holdings of government debt in countries with large financing needs are low as a share of GDP – and vice versa. In short, government debt sustainability risks in the EM are mitigated by favourable underlying debt dynamics, limited-to-non-existent FCY mismatches and the fact that where foreigners make up a significant share of the investor base gross financing requirements are limited and foreign investors hold long-dated bonds.

The world’s fastest-growing economies – China is a major outlier (2013)

Ten of the world’s 200-odd economies registered annual real GDP growth of 9% or more over the past ten years. One would probably have expected economies with low per capita income to dominate the top-10 due to their greater catch-up potential. Interestingly, per capita income varied greatly, ranging (as of 2003) from USD 57,900 (Qatar) to USD 600 (Afghanistan). Today Qatar ranks number one and Afghanistan 177 (out of 187 countries) with a per capita income of USD 102,200 and USD 1,100, respectively. If there is any pattern at all, then it is that seven out of the ten fastest-growing economies are hydrocarbon exporters (75-100% of merchandise exports). Only Afghanistan, China and Myanmar are not major hydrocarbon exporters. In Myanmar, hydrocarbons nonetheless account for slightly more than 40% of exports, while agricultural products account for another 30-35%. Agriculture accounts for almost 60% of Afghan exports. Therefore, China, where manufacturing makes up more than 90% of exports, is the main outlier. In terms of per capita growth, China’s performance looks even more impressive. Population growth in China averaged less than 0.5% annually, compared to almost 3% in Angola and almost 4% in Afghanistan. All of this goes to show just how exceptional China’s economic performance has been over the past ten (in fact, thirty) years.

Source: IMF