Risks of “hidden debt”

Brazil, like most countries of the world, is experiencing a massive jump in its public debt, as a result of spending linked to the health and economic impacts of Covid-19.

According to central bank (BC) data, the government’s total public debt jumped from 76.5% of GDP in February 2020 to 90% of GDP in the same month in 2021. Consequently, the government’s total public debt increased by 13.5 percentage points ( pp) of GDP over a year.

In 2021, as was evident from the budget crisis of the past few weeks, there will be another expense in terms of increasing public debt due to expenditures with Covid – it won’t be as high as 2020, but it has to be big. In terms of the denominator, of course, everything depends on how the Brazilian GDP will grow in these years and in the years to come.

However, a pandemic like Covid-19 is the kind of event that occurs over a long period of time. The last time it was the Spanish flu, just over 100 years ago.

But there is another type of large and unexpected jumps in public debt that can often be said to be predictable: the “contingent liabilities” or “hidden deficits” of governments.

Brazil, which is already experiencing much higher public debt pressures than its peers, cannot do anything to prevent events like a global pandemic, of course (assuring that even if the government’s health response is not as bad as it has been, the cost of taxes will still be high). But it is possible to be concerned with this other, more common source of jumps in public debt.

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In 2016, a group of economists from the International Monetary Fund and the European Commission organized a large batch of data to analyze the problem of contingent liabilities.

In an article published at the timeHe explained that “an emergency commitment is a potential commitment of the government, which depends on a possible future event.”

For example, government guarantees for loans from public or private companies. If there is a default, the cost is on the taxpayer.

Economists point out that a guarantee can be formal but also implicit, when there is political or public pressure to bail out banks, state corporations, or the public finances of sub-national governments.

All of these cases are easily recognizable by Brazilians with a minimum of memory. Contingent liabilities are, in fact, a vital issue for countries like Brazil, where the term “financial structure” was created to emphasize the “unpredictability of the past” – as former Finance Minister Pedro Malan commented.

According to economists from the International Monetary Fund and the European Commission, major economic crises are fertile ground for creating contingent liabilities. An academic study estimated an average of 50% of GDP for hidden deficits that turned into fiscal costs during the external crises in Latin America and Asia in the 1990s through the early 2000s.

Some countries, such as Australia and the United Kingdom, record, monitor, disclose and manage these potential liabilities to reduce budget risk.

However, according to the paper’s authors, “(…) in most cases, taxpayers do not know this until it is too late; that is, when liability is not” probable “but” real. “

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The study conducted in 2016 included 200 incidents of embodying emergency commitments from 80 countries during the period from 1990 to 2014.

This includes “hidden debt” of the most diverse types, including the financial system, subnational governments, public-private partnerships (PPPs), court decisions, state-owned companies and private companies.

One of the main findings of the work has been that the average contingency embodiment cycle costs 6% of GDP, but there are cases where the calculation reaches 20% of GDP.

Another finding the authors reached is that, on average, a country has an emergency liability investigation event every 12 years. Taking an average volume of 6% of GDP, we arrive at a calculation of 0.5 percentage point (pp) of GDP per year.

However, this pattern varies greatly from country to country, and economists immediately take Brazil, from the “unexpected past”, as an example.

In the Brazilian case, from 1990 to 2014, financial structures came out of the treasury on average every five or six years, at an average cost of 8.3% of GDP each.

By doing the same calculation they did for all countries, the annual cost of the contingent liabilities in Brazil would be between 1.4 and 1.7 percentage points of GDP!

Taken together, the bailout in the financial sector is the biggest emergency responsibility – examples are Indonesia, Thailand, and South Korea in the Asian crisis or Iceland in the global crisis. Another heavy bill is the bill for sub-national governments, state-owned enterprises, and legal decisions, as happened in Argentina and Greece in the past decade.

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The authors also point out that the calculation of hidden debt comes in lean times, after moments of high growth, only when there are crises and the pace slows down. The realization of different contingent liabilities tends to occur simultaneously, which increases financial pressure.

Economists wrote: “When it rains, it’s a storm.”

In general, these contingent liabilities explode when public accounts actually deteriorate, with an average deficit worsening by 2% of GDP and an average debt increase of 15% of GDP before stabilizing.

On preventive medicines, in addition to the transparency mentioned in the UK and Australia, the authors found the obvious: Countries with a stronger public sector institutional framework and less volatility in growth suffer less when emergency commitments are met. But they also put a number on it: In these countries, the final cost of hidden debt can be 30% less than the average.

In Brazil, as if the jump in public debt caused by Covid was not enough, there is no indication that the contingent liabilities will stop falling into the arms of the economic difference that has already overshadowed the instability of public solvency.

If there is no rationality, transparency, and political will, the “predicted surprises” will continue to destabilize the Brazilian macroeconomic balance and halt sustainable growth for a long time.

Fernando Dantas is a columnist for Broadcast ([email protected])

This column was published on the radio on 4/22/2020 Thursday.

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