D EALING WITH H IGH D EBT IN AN E RA OF L OW G ROWTH S. Ali Abbas, Bernardin Akitoby, Jochen Andritzky, Helge Berger, Takuji Komatsuzaki, Justin Tyson International Monetary Fund
S CALE OF THE P ROBLEM
Debt at historical highs amid modest growth 100 Gross Debt-to-GDP Ratio and Real GDP Growth 8 (Percent) 90 80 6 70 4 60 2 50 40 0 30 -2 20 GDP growth (all AE, RHS) -4 GDP growth (Euro Area, RHS) 10 Debt-to-GDP (all AE) Debt-to-GDP (Euro Area) 0 -6 1945 1955 1965 1975 1985 1995 2005 Sources: Historical Public Debt Database, IMF Fiscal Monitor, IMF World Economic Outlook, and IMF staff calculations.
A challenging macro-fiscal environment Main Macroeconomic Indicators for Selected Advanced Economies (Percent unless otherwise indicated) 2013 2014-19 Average Inflation Real Average Real Growth Debt ratio r-g Rate Interest Rate Rate Selected Euro France 93.9 1.4 0.8 1.7 -0.8 Germany 78.1 1.6 1.2 1.4 -0.2 Ireland 122.8 1.3 3.0 2.4 0.6 Italy 132.5 1.2 2.8 1.0 1.8 Portugal 128.8 1.3 2.1 1.6 0.5 Spain 93.9 0.9 2.8 1.1 1.7 Non-Euro G7 Canada 89.1 1.9 1.7 2.2 -0.5 Japan 243.2 2.0 -0.1 1.0 -1.1 UK 90.1 2.0 1.9 2.5 -0.5 US 104.5 1.8 2.1 2.7 -0.6 Sources: IMF Fiscal Monitor, IMF World Economic Outlook, and Fund staff calaculations.
W HAT M OVES THE D EBT R ATIO ?
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 25 25 20 20 15 15 Frequency Frequency 10 10 5 5 0 0 -40 -30 -20 -10 0 10 20 30 40 50 60 70 -40 -30 -20 -10 0 10 20 30 40 50 60 70 4-year debt ratio change 4-year debt ratio change Sources: IMF WEO; and IMF Staff calculations and estimates.
…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 25 25 20 20 15 Frequency 15 Frequency 10 10 5 5 0 0 -40 -30 -20 -10 0 10 20 30 40 50 60 70 -40 -30 -20 -10 0 10 20 30 40 50 60 70 4-year debt ratio change 4-year debt ratio change Sources: IMF WEO; and IMF Staff calculations and estimates.
Decomposition of debt changes points to fiscal effort Contribution to Annual Debt Ratio Reductions (Percent of GDP) 0 Mean -2.3 -1 ppt -3.1 ppt -2 +0.9 -3 ppt -2.0 -4 ppt +3.4 -5 ppt Inter- -1.6 -6 quartile ppt range -7 -8 Structural Growth Inflation Interest Stock flow Total primary expenditure adjustment balance Sources:IMF World Economic Outlook; and IMF staff calculations.
…but success shaped by economic conditions Moderate Growth High Growth 0 0 1.0 ppt 2.4 ppt -3.3 ppt High Real Interest Rate -2 -2 -3.7 ppt -1.2 ppt -4 -4 4.1 ppt percent of GDP percent of GDP 8.1 ppt -1.4 ppt -3.4 ppt -6 -6 0.4 ppt -8 -8 -4.9 ppt -10 -10 28% 3.2 ppt 7% -12 -12 0 0 1.7 ppt -3.4 ppt -3.4 ppt -2.9 ppt -2 -2 3.4 ppt Low Real Interest Rate 3.1 ppt -4 -1.7 ppt -4 -2.5 ppt 3.4 ppt percent of GDP -1.3 ppt percent of GDP 1.1 ppt -6 -6 -1.5 ppt 0.9 ppt -8 -8 -10 -10 31% 34% -12 -12 Structural Growth Inflation Stock flow Interest Debt ratio Structural Growth Inflation Stock flow Interest Debt ratio primary adjustment expenditure change primary adjustment expenditure change balance balance
C ONSOLIDATION AND GROWTH
Complicated interaction and trade-offs
Drivers of debt: fiscal effort, growth, interest rate Factors Driving Debt Reversals 120 120 Debt-to-GDP 110 110 100 100 90 90 80 80 70 70 Baseline 60 60 w/ fiscal effort w/ fiscal effort and higher g 50 50 w/ fiscal effort, higher g and lower r 40 40 t-1 t t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+10 Assumptions : Baseline real growth: 1.2 percent (excluding drag from risk premium). Underlying interest rate: 2 percent. Starting debt-to-GDP ratio: 90 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.
Consolidation: to frontload or not to frontload? Growth and Primary Balance Paths for Achieving a Given Debt Reduction 6.0 Primary Balances Deviations from Baseline Output Levels (Percent of GDP) (Percent) 1.0 5.0 4.0 -1.0 3.0 -3.0 2.0 1.0 -5.0 Gradual 0.0 Gradual -7.0 Up-front -1.0 Up-front Up-front (state-dependent multiplier) -9.0 -2.0 t-1 t t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+10 t-1 t t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+10 Assumptions : Baseline real growth: 1.2 percent (excluding drag from risk premium). Underlying interest rate: 2 percent. Starting debt -to-GDP ratio: 90 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 60 percent of GDP target by t+10 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).
Credibility effects: Relatively small? Debt Reversals with Credibility Effects 170 4.0 Debt Deviations from Baseline Output (Percent of GDP) (Percent) 160 3.0 150 2.0 Multiplier effect 140 1.0 0.0 130 120 -1.0 Baseline + fiscal effort + fiscal effort 110 -2.0 + credibility + credibility -3.0 100 t-1 t t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+10 t-1 t t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+10 Assumptions : Baseline real growth: 1.2 percent (excl.drag from risk premium). Underlying interest rate: 2 percent. Starting debt-to-GDP ratio: 130 percent (closer to D_max of 170). Maturity (average): 7 years. Fiscal multiplier: 1 and persists for 4 years. Credibility effect: 30 bps per 1 percent of GDP adjustment. Baseline primary balance: -1. The structural primary balance is adjusted by 2 percent of GDP in t and another 1 percent of GDP in t+1.
U NDERSTANDING P AST D EBT R EDUCTIONS
26 major debt reductions since 1980
Some starting in quite difficult conditions Sources: IMF WEO; and IMF Staff calculations.
Did fiscal effort compensate for low growth?
Sustained effort + supportive external demand 7 20 Median structural primary balance Median export value growth 6 (25th to 75th percentile region shaded) (25th to 75th percentile region shaded) 15 5 4 10 percent of GDP percent 3 2 5 1 0 0 -1 -2 -5 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 14 6 Median REER appreciation Median inflation (25th to 75th percentile region shaded) 12 (25th to 75th percentile region shaded) 4 10 2 percent percent 8 0 6 -2 4 -4 2 0 -6 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
Accommodative monetary policy + credibility effects 6 6 Median private consumption growth Median real GDP growth (25th to 75th percentile region shaded) (25th to 75th percentile region shaded) 5 5 4 4 percent percent 3 3 2 2 1 1 0 0 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 16 9 Median short term treasury bill rate Median real long term interest rate 8 14 (25th to 75th percentile region shaded) (25th to 75th percentile region shaded) 7 12 6 10 percent percent 5 8 4 6 3 4 2 2 1 0 0 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
P OLICY L ESSONS
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)
Policies • Well-designed consolidation: targeted, gradual, within good medium-term strategy—for those that can wait • Monetary policy • Structural reforms for growth
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