May 14, 2012
Government debt is typically reported as the gross debt of the general government. This includes the consolidated debt of all levels of government (including social security funds). General government net debt also accounts for financial assets (excluding government equity holdings and derivatives). Arguably, the best measure of indebtedness is ‘net consolidated government and central bank debt’ – at least as long as contingent liabilities are not a significant concern. Average gross general government in the advanced economies amounts to 81% of GDP. Net debt is a more modest 54%. Net consolidated government and central bank debt is only 33% of GDP. (The averages naturally conceal a significant degree of dispersion.) Unfortunately, the IMF does not provide corresponding figures for the emerging markets. But even on the basis of the more conservative (gross and net general government) debt concepts, debt sustainability will not be an issue in the emerging markets over the medium term. All major emerging markets have general government net debt ratios of less than 40% of GDP (with the exception of India, which holds 20% of GDP worth of equity in publicly trade firms). Research suggests that a debt level of 40% or less can be considered “safe”. Last but certainly not least, high EM debt ratios in the past used to force the authorities to pursue pro-cyclical fiscal and monetary policies in the face of externally-induced growth slowdowns. Today virtually all major emerging market governments/ public sectors are net foreign-currency creditors. By removing the need to keep interest rates high in order to prevent currency depreciation in the face of a balance-of-payments shock, emerging markets are in a position to pursue both counter-cyclical fiscal and monetary policies. The volatility of emerging markets economic growth will therefore likely be lower than in the past.