In five short years we can be on top of the crest – or maybe not
A fresh report on sovereign debt in Europe crossed my desk this week. In it is reviewed all the sad fiscal infringements perpetrated by the southern European nations and the stubborn attitude of their northern neighbours. The report also dissects the current situation of the Nordic countries and those eastern European countries that are Euro hopefuls.
But the one country whose debt summary immediately caught my attention is Ireland. According to this source, Irish government debt soared from 24.9% in 2007 to 41.8% in 2008. While Ireland was battling to cope with the blanket guarantee it provided to its banks, government debt shot past the 100% mark in 2010 reaching a crippling 105% in 2011. For the past two years, the Irish economy has been in survival mode.
The first implosion happened in the real estate market, followed by ballooning unemployment, a reduction in wages, deficits to no end, a collapse of fiscal revenues, and finally, severe political fallout with several Irish opposition parties indicating they will not continue to honour their commitment on behalf of their banking sector.
In academic circles, an economics research piece was released early last year by two eminent academics, Kenneth Rogoff and Carmen Reinhardt. Systematically analysing umpteen sovereign defaults over a period of more than a century (the time for which data is available), these two convincingly argue that government debt, accumulated to a level of 90% of GDP, can be considered as a tipping point after which the economic journey follows a one-way direction in an economic cul-de-sac.
Now you may ask me, what has that to do with us.? We are at a comfortable 27% for total government debt and it is projected to marginally exceed 30% before falling back to around 27% again. I share the view that government debt is not a problem, or at least I shared this view until I saw the Irish trajectory. Here we had one of the best performing economies in Europe with sterling growth rates for more than a decade. The success of the Irish to rapidly grow their economy based on their model of establishing hi-tech industrial clusters, could not be faulted. But in a flash, the debt exploded by a factor of four, going from a level less than ours is now, to the lethal 105%. This happened in just under five years. And that is where the warning lies.
We should not think that because we are still below the magical 30% mark of total government debt to GDP, a combination of exogenous and internal economic factors, cannot quickly push us to the calamitous 90%. The history of sub-Sahara Africa is riddled with clever leaders who sapped foreign grants and development aid to the point where they could not even service the interest on their debt obligations.
It is not the ultimate target for total government debt, the 30 something percent, that scares me, it is the trend, the sentiment and the mentality. Going by last year’s projections for GDP growth, revenue estimates and budget deficit, economic output was 6.2% less than estimated. This led to an increase in the deficit, from a projected 9.6% to a scary 11.2%. Looking at it in a simple way, it does not seem like such a dreadful statistic, I mean, there is only a 1.6% difference. But, the problem is, that is a percentage point increase. The actual deviation, expressed as a percentage, is over 14%.
And these statistics immediately exposes the weakness of our budgets. If all the projections are out by a margin of more than 10%, it basically means they are as unreliable, and unpredictable as rain in the Namib. Compound this deviation over three, four or five years, and you start getting the picture: – our national financial planning may be out by more than 50% within a few years. As a mindgame, apply that rough figure to our deficit, and the horrible picture of total debt approaching the halfway mark materialises in front of your eyes. And this scenario is based on when everything runs according to plan.
Now add the uncontrollable escalation in fuel prices, potential conflict in the middle East, rampant food inflation, another Mugabe or two closer to home, a collapse in commodity prices, and Namibia is on its way following Ireland into the proverbial quagmire.
This scenario is improbable but certainly possible. I do not foresee us falling into a debt spiral but there is definitely an odd chance that, given all the factors I have mentioned over which we have no control, a circumspect approach to our own economic future is the only common sense thing we can do.