Analysis of Australia’s Fiscal Vulnerability to Crisis

Fiscal vulnerability, like a contagion, poses a threat to financial sector stability, which can lead towards sovereign default. This study aimed to assess fiscal vulnerability to crisis by investigating the Australian economy’s gross public debt, net public debt, and net financial liabilities. We used a threshold regression model and compared results with the baseline deficit–debt framework of analysis. The results of the base model suggested that the economy is fiscally sustainable, and that the primary surplus remains unaffected by increasing levels of public debt. In contrast, the threshold regression model indicated that the increasing level of debt has eroded primary surplus below the threshold level of 30.89% of public debt to GDP. These results need further investigation. Therefore, we modified our basic threshold model to capture budget deficit and surplus as a threshold in response to changes in public debt. The results from the sequential threshold regression model using the debt to GDP ratio and primary budget surplus identifying the periods of 1991, 1992, 2008, 2009, 2011 and 2019 as times of likely vulnerability to fiscal crisis. The overall results confirmed that the primary surplus remained sustainable over the estimated threshold level of public debt in all other sample periods and these findings persisted across alternative measures of public debt.

Revisiting the debt-growth nexus: Evidence from India

The main purpose of this study is to examine the debt-growth nexus in India over the period 1984-2019 using Bayer-Hanck and Autoregressive Distributed Lag (ARDL) cointegration techniques. The findings of both techniques suggest the existence of a negative relationship between public debt and economic growth in the long run. The results also confirm the significant negative relationship between foreign exchange reserves and economic growth. Interestingly, the test results confirm the unidirectional causality running from public debt to economic growth in the case of India. From a policy perspective, reducing public debt is imperative to achieve long-term sustainable growth. Efforts should be made to circumvent the burden of burgeoning interest liabilities by generating a primary surplus, which will facilitate debt servicing and timely repayment of debt.

Recovery will depend on Greek cooperation with lenders

Subject Greece’s relationship with its creditors. Significance The first annual GDP growth estimate for 2019 has fallen short of expectations. This is partly counterbalanced by the positive assessment of reform progress given in the European Commission’s fifth Enhanced Surveillance Report. Yet investor trust remains fragile, hinging on the Greek government’s ability to meet economic and financial targets consistently and to maintain a constructive dialogue with its international creditors. Impacts In 2020, investors’ flight to safety could undermine demand for Greek bonds. Cheaper borrowing has improved debt sustainability, supporting government attempts to renegotiate primary surplus targets with creditors. Under-execution of planned public investment could restrict economic growth in 2020.

Belize’s economic recovery will lose steam

Subject The Belize economy. Significance Belize’s economic recovery is stagnating following a severe drought that has had a harsh impact on agriculture and hydropower generation. The situation has been compounded by a slowdown in tourist arrivals following years of buoyant growth, reflecting weaker global expansion and the grounding of Boeing 737 MAX aircraft, which service the country. Impacts The current account deficit will remain large, with international reserves averaging just three months of imports. The primary surplus will narrow due to increasing spending on wages and public investment and weaker-than-expected revenue. This being an election year, cuts to current expenditures will probably be off the table, limiting debt reduction in the short term. Funding constraints will hit the government’s ability to pursue much-needed reforms in infrastructure and education.

Brazil's debt outlook improves but surplus is distant

Subject Outlook for Brazilian debt. Significance With a sharp fall in interest rates since 2016 and a lower-than-expected fiscal deficit last year, Brazil's fiscal and public debt panorama improved in 2019. The public debt stock, which earlier in 2019 was projected to end the year near 80% of GDP, fell to 77.7% by end-November and is likely to have fallen further in December. Impacts A primary surplus is not on the cards for this year. Despite an improved outlook, a 2020 improvement to Brazil's sovereign rating is possible, but far from certain. A return to investment grade is at least some years away.

Belize

Belize’s economic recovery continues but the pace is slowing. Real GDP grew by 3.2 percent in 2018, but recent data indicate a slowdown, reflecting a severe drought, with growth projected to average 2 percent during 2019-20. The primary fiscal surplus reached 2.1 percent of GDP in FY2018/19––a 4 percent of GDP rise from two years ago––but the primary surplus is expected to narrow this year and remain below 2 percent of GDP for the following two years. Public debt remains above 90 percent of GDP, the current account deficit is projected to remain large over the medium term, and international reserves are just below 3 months of imports of goods and services. The pace of structural reform has been slow. Downside risks, including from slower U.S. growth, natural disasters, crime, and renewed pressures on correspondent banking relationships (CBRs) could weaken growth and financial stability.

Back to the Future

This paper assesses the cyclicality and sustainability of fiscal policy in Belize and applies a stochastic simulation model to determine the optimal set of fiscal rules. The empirical analysis shows that fiscal policy in Belize has been significantly procyclical and unsustainable much of the period since 1976. While the government’s recent commitment to maintain a primary surplus of at least 2 percent of GDP until 2021 is supporting debt reduction, stochastic simulations indicate that further improvement in the primary balance is necessary to reliably bring the debt-to-GDP ratio to a sustainable path. Given Belize’s history of large economic shocks, this paper proposes explicit fiscal rules designed for countercyclical policy and debt sustainability. It recommends integrating such rules into a well-designed fiscal responsibility law and establishing an independent fiscal council to improve accountability and transparency.

An alert on the recent fall of the fiscal reaction in Brazil

ABSTRACT Recent evaluations of how the Brazilian government’s primary surplus reacts to the evolution of the debt to GDP ratio convey two important (and worrisome) messages: first, the reaction function has been almost steadily decreasing since 2012. Second, it has turned from positive to negative figures as of October 2017. With effective real interest rates (over the net government debt) higher than prospects of GDP growth, negative figures for the fiscal reaction function mean a non-sustainable debt trajectory. Therefore, significant fiscal adjustments are required in the short run.

INTEREST RATE TARGETS AND SPECULATIVE ATTACKS ON PUBLIC DEBT

The application of exchange rate target zones modeling to interest rates allows interpreting the puzzles that emerged with the public debt euro area crisis, namely the nonlinear behavior of the interest rates and the fact that some stand-alone countries, not belonging to the euro area, have not been subject to speculative attacks in spite of equally large public debt-to-gross domestic product (GDP) ratios. As a matter of fact, this model shows that in the case of a noncredible upper threshold for the interest rate (that may be due to both the lack of room for increasing further the required government primary surplus and/or the absence of a monetary authority acting as a lender of last resort), the resulting public debt unsustainability determines an interest rate nonlinearity and makes the crisis possible for public debt levels that would be stable in the presence of a credible interest rate target.