Emerging markets tend to borrow in local currency to avoid the risk of default
Finance ministers would have been very shocked last year by the amount of borrowing their successors should have contemplated now, but they would have been very surprised at how low the cost of that borrowing was.
In many countries, the interest rate on government debt is expected to remain below the nominal growth rate of the economy for the foreseeable future.
In other words, the “growth-adjusted interest rate,” as some economists call it, will be negative.
And recent forecasts by the credit rating agency Standard & Poor’s indicate that this is the way all rich countries will be in 2023.
The British magazine “The Economist” reported that this scenario prompted some economists, including Olivier Blanchard, to rethink the financial borders of countries such as the United States, Japan and members of the eurozone.
And in a lecture hosted by Ashoka University in India, last month, Blanchard, a former chief economist at the International Monetary Fund, said that governments should not focus on recording magic numbers regarding the debt-to-GDP ratio. The past, and its backwash may be greater now.
However, the financial accounts do not appear to be upside down only in rich countries. Interest rates are likely to be lower than the growth rate of 53 of the 60 largest emerging economies, and in some cases it can be astonishing.
Standard & Poor’s expects the growth adjusted interest rate in 2023 to be -3.6% in India, -6.5% in China and -33.8% in Argentina.
This raises an obvious question: “Should emerging economies also reconsider their fiscal limits?” Some were quick to do so.
There is India, for example, which expects to record a deficit of 9.5% of GDP for the current fiscal year, while GBMorgan Chase believes that the total deficit, which includes the state’s public finances, may reach 15% of The gross domestic product, without presenting any plan to reduce it to less than 3%, which is the limit stipulated in the previous fiscal rules.
The latest economic survey by the government’s chief economic adviser indicates that India’s rate of interest has been below its growth rate. This survey attempts to quote from Blanchard’s work, to provide an intellectual anchor for the Indian government to be more relaxed about debt and financial spending during a period of slowdown in growth or economic crisis.
But while fiscal enthusiasm is the norm in many emerging economies, finance ministers should also be concerned about the exceptions.
When interest rates fall below growth rates, the budget calculations become somewhat contradictory, and governments can keep the debt constant, relative to the size of the economy, even if they are constantly overspending, as long as their budget deficits are not so large.
If its deficit – with the exception of interest payments – exceeds this limit temporarily, its debt ratio will rise temporarily, but the deficit will then gradually decrease to its previous levels, and if the deficit rises permanently, the debt ratio also stabilizes at a high level, but it will not accumulate, because the strength of interest Compound is offset by a compound growth force.
To understand how strange the situation is, consider the following scenario: Suppose the government can maintain debt stability at 60% of GDP with a deficit, before paying interest, of 3%.
Then assume that an epidemic has spread, pushing the debt to 80%, and therefore you may think that it is difficult to bear this high debt, which requires a tighter budget than it was before the epidemic, but you are wrong in this thinking because the government instead needs a deficit of 4% To stabilize the new debt ratio.
Although this financial mathematics is strange, it is not new, according to The Economist.
Emerging economies usually borrow in foreign currencies, such as the dollar, and thus if the exchange rate weakens, their foreign currency debts could increase sharply, compared to the size of their economies, even if interest rates remain low, and the cost of borrowing can also rise quickly if investors fear a default. Repayment, which is a fear that can come about automatically.
In recent decades, most emerging economies have found it easier to borrow in their own currencies, which makes their debts safer because their central banks can – in theory – print money owed to creditors if necessary, but the fear of default still remains.
The Economist: Should emerging economies ’governments be concerned about their debt? It was written in the Stock Exchange newspaper.