You’ve probably seen headlines at various points stating that the T&T government has just borrowed a few hundred million US dollars from the Development Bank of Latin America (CAF), the Chinese government, some other multilateral agency or country and you’re wondering if you should be concerned.

Well, let me reassure you friends, you should absolutely be concerned! The level of government indebtedness should stalk your nightmares much in the same way as if Skinny Fabulous actually did follow the lyrics of his song and get naked and jam up on yuh. That’s because we the citizens are the ones that have to repay that debt.

Rather than focus on whether these monies are being borrowed to fund projects that would contribute to the productive capacity of the country or if they are to fund projects just to gather votes, let’s focus on a framework to look at government debt, not just in sweet T&T but also to use to compare different countries.

First of all, the absolute level debt of a nation is almost meaningless. Just as Courts furniture store or your local bar-wench determines if to extend credit to you based on your ability to pay, so too we need to look at debt levels in reference to a country’s ability to pay aka its Gross Domestic Product (GDP). This is known as the debt-to-GDP ratio.

For example, in 2017, Germany’s debt was US$2.7 trillion, compared to that of Greece, which was US$514 billion. However, Greece is the one that had the debt crisis with a debt-to-GDP ratio of 182% and had to be bailed out by Germany whose debt-to-GDP ratio was 72%.

Ok, so now you’re probably screaming at your Nokia 3310, Motorola StarTAC or, if you’re fancy, your PalmPilot asking what is a safe level of debt-to-GDP. Well for sure having debt that is more than 100% of GDP is not a good idea. I mean if you spend all your money paying debt how are you going to pay for essentials like KFC, boat ride, and weave?

A study by the World Bank found that for emerging market countries (that’s us), each additional percentage point above 64%, annually reduces economic growth by 2%. The IMF identified 60% as the threshold for sustainable debt levels. To put that in context, T&T’s curent ratio is 65.5%, while Barbados is currently at 119.5%. Barbados’ debt reached a high of 158% before they were forced to approach the IMF (not Tom Cruise and Ving Rhames) for help.

Now people will try to bamboozle you by measuring debt in different ways, that way they can manipulate the ratio without technically lying. The measure of debt you need to focus on in T&T is what they call the Net Public Sector debt. This is the debt owed to entities both locally and internationally (excluding any debt sterilized as part of monetary policy actions). This also excludes debt the government owes to itself through State Enterprises and such.

You should also pay attention to the amount of debt denominated in foreign currencies, particularly in USD, called External Debt (16.7% of GDP). That’s because when you borrow in a foreign currency you have to pay both principal and interest in that currency. International investors don’t want our monopoly polymers or payment in sugar cake and toolum.

Which brings us to the implications of having a prolonged high debt ratio. Firstly there is a negative impact on GDP as you divert more and more funds from productive uses to repay debt. Which only makes your ratio get worse.

There is also pressure on your foreign currency reserves and as a result your exchange rate as you use scarce FX to repay debt. This could leave you with a balance of payments crisis where you’re struggling to pay for imported goods like bananas, sugar, imitation Lacoste jerseys and now fuel. This is of particular relevance to us given that we are down to 7.6 months of import cover as at Dec 2019 from a high of 14.1 months in 2011.

Sustained high debt ratios make international investors and credit rating agencies nervous. Investors require higher interest rates to lend you money as you’re perceived as riskier. Rating agencies may also downgrade your debt for the same reason.

The situation gets even worse when governments attempt to spend their way out of a recession. This approach is a key tenet of what’s known as Keynesian economics (we’ll discuss that another time). They borrow money to fund projects to spur growth which raises debt levels and could lead to a debt crisis later down the road, but they figure that would be someone else’s problem by then. Sound familiar?

So there you have it. The next time you read about the country borrowing money to fix a building, airport, box drain or someone in a Chamber of Commerce breakfast meeting is talking about how our debt is at a manageable level, you can stand up and ask intelligent questions. I take no responsibility if security physically removes you from the meeting.


Leave a Reply