In a document published on June 11, the Ministry of Finance estimated that T&T's gross public sector debt had grown to $68.2 billion or 51.1 per cent of the country's gross domestic product as at the end of April.
The country's estimated $68.2 billion debt comprised the following elements:
�2 Central government debt–$38.5 billion;
�2 External debt (in TT$)–$9.8 billion;
�2 Contingent liabilities–$19.7 billion
These figures exclude the local debt of state enterprises without government guarantees and the foreign debt of state enterprises without government guarantees.
The document, which is entitled, The State of our Finances and Initiatives for Future Action states: "The country's debt stock as a percentage of GDP has now passed the 50 per cent threshold which economists use as the area of danger." First of all, I have yet to come upon a reputable economist who considers a debt to GDP ratio of 50 per cent to be a threshold signaling "an area of danger." Secondly, if there is a threshold for a country's debt, it is more often cited as 60 per cent. According to a useful graphic on the BBC Web site, in Europe government debt must not exceed 60 per cent of GDP at the end of a fiscal year under the convergence criteria adopted as part of the economic and monetary union. The criteria also dictate that the fiscal deficits of European Union member governments must not exceed 3 per cent of GDP.
At the end of 2009, total debt as a percentage of GDP of Germany, the strongest economy in Europe, was 73.2 per cent. France had a debt to GDP ratio of 77.6 per cent and Belgium 96.7 per cent. At 73.2 per cent, Germany's total debt to GDP ratio is higher than the UK's, at 68.1 per cent, and Ireland's at 64 per cent. Ireland is in danger of financial collapse while Germany is not. Moody's rating service downgraded Ireland on Monday not because of the size of its total debt but because of concerns about its ability to repay that debt. (Japan's total debt is nearly twice the size of its economy but it remains a triple-A rated economy).
And ability to repay is a function of many factors not least of which is the pace at which the debt is growing, which is a function of the size of the fiscal deficit. Germany's fiscal deficit at the end of 2009 was 3.3 per cent, while Ireland's was 14.3 per cent, the UK's was 11.5 per cent and France's was 7.5 per cent. In other words, analysis that describes this country's national debt as signaling "the beginnings of a crisis of indebtedness," and as being "one of the most disturbing developments in the Trinidad & Tobago economy" is unsophisticated and superficial. It seems to me that while a country's total debt is important, there are other issues surrounding the issue of sovereign indebtedness that are far more significant for an understanding of the impact of debt on a country:
1) More important than T&T's total debt is the country's total debt service obligation/ratio. In other words, what is the amount of money that forms a direct charge on the Consolidated Fund that is going to make debt service payments. At about 12 per cent, T&T's current debt service ratio is cause for mild concern, because it means less money going to pay increases to the salaries of public servants and to subsidise gasoline, but it is not an indication of "danger" or disturbance.
2) More important than the country's total debt is the maturity structure of the debt. If the country's debt is mostly long term, in excess of five years, it is much less of an immediate concern than if the debt is mostly short term. Most of the recent bonds issued by the Central Government, or issued by state enterprises and guaranteed by the Central Government, have been in excess of ten years.
3) More important than the country's total debt is the issue of the bunching of principal or bullet payments or the extent to which these obligations are spread out. This question is particularly important given the country's experience in 1986 and 1987. But again, learning from the experience of the late eighties, the Central Bank and the Ministry of Finance have taken steps to ensure that there will not be a bunching of the country's debt in the foreseeable future–if T&T's revenues remain relatively stable.
4) More important than the country's total debt is the currency structure of the debt. The Ministry of Finance document indicates that over 85 per cent of the T&T's gross public sector debt is in TT dollars and about 15 per cent is in foreign currency. The document also indicates that 70 per cent (about $6.9 billion) of the country's external debt is in US dollars. Does it make a difference to T&T that about 15 per cent of its total debt is denominated in foreign currencies, mostly US dollars, and 85 per cent of its debt is denominated in TT dollars? It does because it means that the Government can service most of its debt by raising TT dollars. It also means movements in international interest rates (for foreign debt at floating rates) and fluctuations in the value of the US dollar would have less of an impact on the T&T economy than if a higher percentage of its debt was denominated in foreign currencies.
5) More important than the total debt to GDP ratio is the extent to which predictions of future growth in the economy come to pass. If the T&T economy grows by 2 or 3 per cent in 2011, the country would be able to take on additional debt because the denominator (GDP) would have grown, which means that the numerator (debt) can grow as well. If, however, T&T's GDP remains flat, the country would be constrained in the amount of debt it can take on.
6) More important than the total debt is the interest rate that previous bonds were issued at and that new bonds are being issued at. If previous bonds were issued at a high rate and can be "called" and replaced with bonds at a lower rate, the country would be ahead of the game.
7) And more important than the total debt is the extent to which T&T is able to curb its fiscal deficit down to the magic number of three per cent because in the current scenario fiscal deficits are being financed largely by issuing of TT dollar bonds. In other words, the significant reduction in the fiscal deficit, as forecast by the Central Bank in the April Monetary Policy Review, is likely to mean that T&T will not have to borrow as much as had been originally predicted when the preparations for the 2010 budget were being finalised.
The real concern that those who are responsible for planning the local economy should have, is not the size of the country's total debt, but on our ability to engineer growth in the economy such that we will always be able to maintain our debt and deficits at reasonable levels (60 per cent and three per cent respectively). The fact that this country has maintained a sovereign credit rating of A/A+ (Standard and Poors), second only behind Chile in Latin America and the Caribbean, should indicate that the government has some room to continue borrowing to fund the 2011 deficit, if it is able to come up with a credible plan to reduce the deficit and the debt in the medium term and if it can get the economy to grow.