Several studies indicate that the appropriate ratio of public debt to GDP for emerging economies should be around 60%. If it exceeds this level, growth may not be sustainable. However, due to the COVID-19 situation, public debt is likely to exceed 60% in the next 1-3 years. What will happen if this becomes a reality?

The 60% figure refers to the ratio of public debt to GDP based on data from the Public Debt Management Office, Ministry of Finance, around 1999-2000, when Thailand issued a large number of bonds to revive the economy and address financial institution issues from the 1997 crisis. After that, the ratio of public debt to GDP gradually decreased, reaching a low of 35% in 2008. As of June 2020, it stood at 46%.

Several studies suggest that the appropriate level for emerging economies is slightly above 60%. If it goes higher, it may lead to unsustainable growth, as economic growth may not keep pace with the debt burden and interest payments. This figure is considered a framework for fiscal sustainability but is not a legally binding number that cannot be adjusted.

In the COVID-19 situation, fiscal discipline is not more important than economic recovery. The public sentiment accepts that borrowing a significant amount is necessary, even though public debt may exceed 60% in the next 1-3 years due to increased borrowing, lower or slower revenue collection, and potentially lower GDP than estimated.

Let’s hypothesize that if the figure exceeds 60%, there will be three main concerns and explore how serious they really are or if they might resolve themselves:

 

1. Questions from credit rating agencies regarding fiscal status and the risk of a downgrade in credit rating

A report from Fitch Ratings indicates that in the first half of 2020, 33 countries worldwide had their sovereign ratings downgraded, not including another 40 countries that had their outlook adjusted.

For Thailand, although there has been no downgrade in credit rating yet, the outlook was adjusted from Positive to Stable by Fitch Ratings on March 17, 2020, followed by S&P on April 13 and Moody’s on April 21. This includes the anticipated increase in public debt.

However, public debt is just one of many factors leading to a credit rating downgrade. Indeed, the rating report highlights Thailand's weaknesses, such as low economic growth, but it also points out strengths, such as a current account surplus, high foreign reserves, and very low public debt in foreign currency, which is less than 3% of total public debt. These factors help mitigate the risk of a credit rating downgrade.

Therefore, if we can demonstrate that our debt is manageable and is expected to decrease to normal levels in the future, it should help reduce the risk of a credit rating downgrade.

2. Will the need to issue massive bonds threaten market stability?

In this regard, the Ministry of Finance has consistently signaled that the volume of government bond issuance must be at a level that the market can absorb without affecting market stability. Measures have already been taken to allocate and distribute borrowing across various sources appropriately, rather than relying solely on the bond market.

However, if yield rates fluctuate significantly, there is an important reserve weapon: QE. The Bank of Thailand can absorb bonds from the market through purchases in the secondary market or through other supportive measures, which will help stabilize the bond market.

Thus, this issue should not be overly concerning.

3. Will government fundraising compete with private sector fundraising?

This is one of the reasons behind the news in August that the Ministry of Finance reached an agreement to borrow $1.5 billion from the Asian Development Bank, or nearly 50 billion baht, to diversify funding sources and not compete for liquidity within the country, as private companies also need to increase their debt levels. Additionally, the Ministry of Finance has opened the door for further borrowing in foreign currencies.

Moreover, the balance sheets of commercial banks expanded in the first half of the year, both in terms of deposits and loans. In the first half of 2020, deposits grew by 7.5%, and loans increased by 4.4%, indicating that the banking mechanism is still effectively linking and transmitting liquidity between the state and the private sector. The injection of liquidity into the economy remains balanced, with no particular blockage in any part of the system.

This assessment of the situation may not be sufficient, as other variables may arise in the future. However, if the situation eases, the ratio of public debt should return to normal levels, which would be a victory for borrowing beyond normal levels.

SOURCE: www.bangkokbiznews.com