DEALING WITH HIGH DEBT

Transcription

1 DEALING WITH HIGH DEBT IN AN ERA OF LOW GROWTH S. Ali Abbas, Bernardin Akitoby, Jochen Andritzky, Helge Berger, Takuji Komatsuzaki, Justin Tyson International Monetary Fund

2 SCALE OF THE PROBLEM

3 Debt at historical highs amid modest growth Gross Debt-to-GDP Ratio and Real GDP Growth (Percent) GDP growth (all AE, RHS) GDP growth (Euro Area, RHS) Debt-to-GDP (all AE) Debt-to-GDP (Euro Area) Sources: Historical Public Debt Database, IMF Fiscal Monitor, IMF World Economic Outlook, and IMF staff calculations.

4 A challenging macro fiscal environment Main Macroeconomic Indicators for Selected Advanced Economies (Percent unless otherwise indicated) Average Debt \1 Real Marginal Interest Rate Inflation Rate Real Average Interest Rate Real Growth Rate r-g Selected Euro France Germany Ireland Italy Portugal Spain Non-Euro G7 Canada Japan UK US Sources: IMF Fiscal Monitor, IMF World Economic Outlook, and Fund staff calculations. \1 Percent of GDP

5 WHAT MOVES THE DEBT RATIO?

6 Debt falls with high growth and primary balances Distribution of Debt Ratio Changes (1) High primary balance Low primary balance Above median growth Below median growth Frequency 15 1 Frequency year debt ratio change 4-year debt ratio change Sources: IMF WEO; and IMF Staff calculations and estimates.

7 while inflation & interest rates have little impact Density of Debt Ratio Changes (2) Low inflation High inflation Low real interest rate High real interest rate Frequency 15 1 Frequency year debt ratio change Sources: IMF WEO; and IMF Staff calculations and estimates year debt ratio change

8 Decomposition of debt changes points to fiscal effort Contribution to Annual Debt Ratio Reductions (Percent of GDP) ppt Mean -2.3 ppt ppt ppt Interquartile range -1.6 ppt +3.4 ppt -8 Structural primary balance Growth Inflation Interest expenditure Stock flow adjustment Total Sources:IMF World Economic Outlook; and IMF staff calculations.

9 but success shaped by economic conditions High Real Interest Rate percent of GDP ppt 28% -1.2 ppt High Growth -1.4 ppt.4 ppt 4.1 ppt 2.4 ppt percent of GDP ppt 7% -3.4 ppt Moderate Growth 8.1 ppt -4.9 ppt 3.2 ppt 1. ppt Low Real Interest Rate percent of GDP ppt 34% Structural primary balance -2.5 ppt 3.4 ppt -1.5 ppt.9 ppt Growth Inflation Stock flow Interest adjustment expenditure 3.4 ppt Debt ratio change percent of GDP ppt 31% Structural primary balance -1.7 ppt 3.1 ppt -1.3 ppt 1.1 ppt Growth Inflation Stock flow Interest adjustment expenditure 1.7 ppt Debt ratio change

10 MECHANICS AND TRADE OFFS

11 Complicated interaction and trade offs

12 Drivers of debt: fiscal effort, growth, interest rate 12 Debt-to-GDP Factors Driving Debt Reversals Baseline w/ fiscal effort 5 w/ fiscal effort and higher g 5 w/ fiscal effort, higher g and lower r 4 4 t-1 t t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+1 Assumptions: Baseline real growth: 1.2 percent (excluding drag f rom risk premium). Underlying interest rate: 2 percent. Starting debt-to-gdp ratio: 9 percent. Maturity (average): 7 years. Fiscal multiplier: 1 and persists for 4 years. Credibility effect: 15 bps per 1 percent of GDP adjustment. The structural primary balance is adjusted by 2 percent of GDP in t and 1 percent more in t+1. Higher growth and lower interest scenarios increase/decrease baseline rates by 1 percentage point respectively. 6

13 Consolidation: to frontload or not to frontload? Growth and Primary Balance Paths for Achieving a Given Debt Reduction Primary Balances (Percent of GDP) 1. Deviations from Baseline Output Levels (Percent) Gradual Gradual -7. Up-front -1. Up-front Up-front (state-dependent multiplier) t-1 t t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+1 t-1 t t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+1 Assumptions: Baseline real growth: 1.2 percent (excluding drag from risk premium). Underlying interest rate: 2 percent. Starting debt -to-gdp ratio: 9 percent. Maturity (average): 7 years. Fiscal multiplier (regular) : 1 and persists for 4 years. Credibility effect: 15 bps per 1 percent of GDP adjustment. Fiscal multiplier (state-dependent): 1.5, peaks in t+1 and persists for 5 years. The structural primary balance is adjusted in order to meet a 6 percent of GDP target by t+1 under two strategies: gradual adjustment over 5 years (total adjustment needed is 6 percent of GDP) or up-front adjustment (total adjustment needed is 4.8 percent of GDP with regular multiplier and 5.3 percent of GDP with state-dependent multiplier).

14 Credibility effects: Relatively small? Deviations from Baseline Output (Percent) Debt Reversals with Credibility Effects Debt (Percent of GDP) Multiplier effect fiscal effort + credibility Baseline + fiscal effort + credibility -3. t-1 t t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+1 Assumptions: Baseline real growth: 1.2 percent (excl.drag from risk premium). Starting debt-to-gdp ratio: 13 percent (closer to D_max of 17). Fiscal multiplier: 1 and persists for 4 years. Baseline primary balance: t-1 t t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+1 Underlying interest rate: 2 percent. Maturity (average): 7 years. Credibility effect: 3 bps per 1 percent of GDP adjustment. The structural primary balance is adjusted by 2 percent of GDP in t and another 1 percent of GDP in t+1.

15 UNDERSTANDING PAST DEBT REDUCTIONS

16 26 major debt reductions since 198

17 Some starting in quite difficult conditions Sources: IMF WEO; and IMF Staff calculations.

18 Did fiscal effort compensate for low growth?

19 Sustained effort + supportive external demand Median structural primary balance (25th to 75th percentile region shaded) 2 15 Median export value growth (25th to 75th percentile region shaded) percent of GDP percent t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 Median inflation (25th to 75th percentile region shaded) t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 Median REER appreciation (25th to 75th percentile region shaded) percent percent t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5-6 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5

20 Accommodative monetary policy + credibility effects 6 5 Median real GDP growth (25th to 75th percentile region shaded) 6 5 Median private consumption growth (25th to 75th percentile region shaded) 4 4 percent 3 percent t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 percent Median short term treasury bill rate (25th to 75th percentile region shaded) percent Median real long term interest rate (25th to 75th percentile region shaded) t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5

21 POLICY LESSONS

22 Good news and bad news Examples of successful debt reductions, even under adverse circumstances Current environment shifts much of the burden to fiscal policy Trade offs (where there is a choice)

23 Policies Well designed consolidation: targeted, gradual, within good medium term strategy for those that can wait Monetary policy Structural reforms for growth