Public debt management as weight management

Recently I decided to start exercising more and eating healthier to help bring my weight down to a more socially agreeable level because, let’s face it, “dad bods” are sadly nowhere near the hot trend of the summer proclaimed by gossip magazines. As a public debt management expert consultant, I then quickly realized how many debt management lessons can be learned from weight management techniques and dynamics. The analogy is almost complete. Read on.

 Public debt accumulation: Calorific surplus (or simply, when your daily calorie intake from food is higher than your calorie burn) leads to weight accumulation just like chronic budget deficits lead to debt accumulation. Additionally, the pace of debt accumulation is a direct factor of the size and frequency of budget deficits and the level of economic growth: persistent and sizeable budget deficits, coupled with sluggish real growth rates, lead directly to a rapid rate of debt accumulation (assuming that the financial gap is financed from net borrowing, and not from drawing down of asset reserves). It is common knowledge that a healthy diet and exercise help maintain a healthy weight. In public finance, dieting is the equivalent of fiscal discipline, and exercise is the equivalent of pro-growth reforms and investments.

Public debt composition:  Public debt management focus has been for the longest time focused solely on the level of public debt (often expressed as a percent of GDP), and its long term sustainability. Rules of thumb (40 percent) were floated indicating the maximum levels of debt to GDP below which debt is considered sustainable. For the past decade or so, a new thinking on public debt management is now highlighting the importance of the composition of public debt: how you borrow is apparently as important as how much, and public debt portfolio cost and risk dynamics are important dimensions to manage through a well-designed and implemented medium-term debt strategy. In parallel, we also know that what we eat (sugar, fat, carbs) is as important as how much we eat (total calories): that pint of heavy cream can conceivably be substituted with a same amount of much healthier low-fat Greek yogurt. Even fat has good fat and bad fat types. Diet choices are thus crucial for a healthy living, and choices abound.

The cost of public debt: The cost of public debt is often approximated and captured by a statistical measure like the average interest rate paid on the debt portfolio, but this relatively simple measure often ignores the hidden and sometimes non-financial costs of debt accumulation like social costs (see modern day Greece), the eviction effect of buying domestic government securities, the hidden cost of tied aid from certain bilateral creditors, and others. Similarly, unhealthy weight management practices and diet choices often lead to bigger health problems down the road like heart disease and diabetes: That 5 dollar McDonald combo may look cheap and tasty, but its ultimate cost on your health may prove down the road to be higher than you could bare.

Portfolio risks: The overall risk profile of the debt portfolio is determined by the levels of risk factors like refinancing risk and/or exchange rate and interest rate risk. For example, high refinancing risk exposes the portfolio to short-term frequent rollover of (generally cheaper) debt, but at possibly different terms and most likely higher volumes each time. Similarly, a diet high in (cheap artificial) sweeteners for example exposes the body to frequent intra-day snacking due to a large fluctuations of sugar-derived energy levels during the day. This often leads to on average eating more to counter the effect of energy crash.

Debt relief: When weight becomes unmanageable, gastric bypass surgery is often used as a drastic measure to return to normal weight. In public debt management parlance, this is the equivalent of irrevocable debt relief from creditors. But just as weight will likely re-accumulate if nothing is done about one’s eating and exercise habits, debt is likely to re-accumulate (and often at faster pace than before) if nothing is done about the structural factors behind debt accumulation, like sluggish growth and poor fiscal discipline. That’s why creditors often insist on wide-ranging structural reforms as a condition for debt relief (albeit my decade-long experience as public debt consultant tells me that monitoring and follow-up by multilateral creditors is often weak and spotty).

Growth: Body metabolism is the process by which food is transformed to energy. People with high metabolic rates burn fat faster and more effectively than people whose metabolic rate is slower. Slow metabolic rate is often a result of a combination of age and daily practices. Healthy eating habits and regular exercise helps keep metabolic rates at reasonable levels. Economies with slow metabolic rates (sluggish growth, structural inefficiencies, and poor governance) would have a harder time “absorbing” debt into productive, investment-driven economic activities that would ultimately improve economic growth, and hence help raise the metabolic rate of economies.

DMO independence: Debt managers often complain about undue interference from the political class in debt management decisions and lack of independence of the debt management office (DMO). In a social setting, this is called peer pressure (“what do you mean you can’t come out with us tonight for a few beers??”). Fiscal discipline is not very popular for politicians in an election year, and let’s face it, the gym is boring, but go ahead, go out, be social, don’t be a party-pooper, but count your beers wisely and be ready to hit the gym the following morning.

Ultimately, if we were to distill some practical lessons for public debt managers from weight management and healthy living practices, we find the following sensible recommendations:

  •  Debt composition matters: Watch what you eat as well as how much you eat or you could be liable for health trouble down the road. This is the essence of the medium term debt strategy (MTDS) vs the debt sustainability analysis (DSA) argument.
  • There are no magic solutions to public debt: Burn more calories than your daily calorie intake and maintain healthy metabolic rate through regular exercise and diet choices. Lean and credible budgets are a pre-requisite, and fiscal discipline is hard to achieve and maintain overnight. A harsh, prolonged, and unrealistic diet will ultimately kill your body and lead to over-eating relapse, just like overly-harsh fiscal austerity measures are likely to choke off your economy and lead to a public spending binge in efforts to revive growth.
  • Debt relief only buys you time if countries don’t upgrade their debt management capacity and practices in the meantime. Statistics show that gastric bypass surgery is only successful in keeping the weight off for only a small fraction of patients.
  • Debt is not bad by itself if you’re borrowing sensibly to finance needed investments for the economies that will ultimately accelerate growth. Eat what you want (within sensible limits) but make sure you find effective ways to burn it.
  • Each body is different and unique in its ability to burn calories (environmental, genetic, chronic diseases), just like each economy is different and unique in its structure and growth engines. Debt managers should avoid the temptation of comparing with and imitating other jurisdictions when it comes to public debt management practices. Similarly, countries with specific economic features like a narrow economic base and high natural vulnerabilities to external shocks are left with little maneuver space when it comes to borrowing and debt.
  • DMOs should set reasonable debt management objectives and diligently pursue them: you simply can’t stabilize your debt in the short to medium term if you keep running successive budget deficits in a sluggish growth environment, just like you can’t possibly expect to lose some weight if you eat junk food 5 times a week and have your idea of an active life as walking to the nearest burger joint.
  • You can still borrow to finance that mega infrastructure project with an equally-mega loan from EXIM bank [insert latest emerging bilateral creditor] “for the good of the country” (says the Minister of Finance), but make sure you negotiate the terms of the loan according to your preferred debt portfolio risk profile if you are presented with choices of loan terms and creditors.

High debt levels is a burden on the economy, but a couple of pounds around the waist enhances love handles, and I’ve heard from the same aforementioned gossip magazines that love handles are in vogue again!

Debt reporting on steroids using TABLEAU 8.2

I’ve been recently working on an idea/project after being on so many public debt management missions observing so many debt management offices struggle with low headcounts/capacity (among other things) and the ability to produce analytical debt output.

The idea is simple: using the data visualization software Tableau, debt management offices (DMOs) greatly streamline and enhance their debt reporting function, allowing them to produce web-based debt statistical bulletins and reports with minimal effort and maximum impact.

The selling points:

  • The production process of the debt report/bulletin is highly automated and streamlined, requiring no more than 30 minutes time for each update (once a month/quarter/year, depending on frequency of debt report), thus freeing up the DMOs time to do other analytical functions. That’s benefit #1 in my mind.
  • The data is sourced from a very simple and streamlined Excel file, which is then linked to the Tableau web interface. Making changes in the Excel file automatically and instantaneously reflects on the web output. No additional coding skills required once the web report template is designed.
  • The web output is fully customizable in layout and content, and integrates easily into any existing DMO/MoF webpages.
  • It is visually stunning, sleek, and modern, but most importantly, it’s “live”! Hover the mouse over different chart components to reveal additional underlying data. Click on individual components to highlight/shade/sort/filter them for easy viewing (try it using the link below). How many DMOs you know out there have “live”, interactive debt bulletins?
  • The web output can be exported into PDF bulletins with just one click, for easy archiving and distribution/printing outside the web environment.

Click on link below for a demo I’ve designed. I used fictitious data from a fictitious country. Page 1 is more descriptive of the debt portfolio (structure and evolution), page 2 is more analytical (cost and risk).

http://www.thehardnumber.com/demo

See a Prezi presentation on the Dashboard here

Enjoy!

For Barbados, Staring into the Abyss can be Scary, but Somehow Reassuring

A steady stream of rumors and speculations has been sweeping the public and not so public forums in Barbados lately about the state and fate of the economy. The intensity of the speculation has been ratcheted up significantly following the release last week of the much anticipated Central Bank’s 6-month economic review, whose bleak assessment of the current situation (and most troubling, the future outlook) helped feed the growing suspicion and fear that things may have come unhinged once and for all. Talk of an IMF financial rescue program, complete with harsh conditionality and possibly a voluntary devaluation of the local currency, now sounds as imminent and inevitable as Kadooment after Cropover. While there is plenty of reason for concern, policy makers in Barbados should not succumb to the panic and should instead let their heads cool down in the gentle Caribbean breeze, and prevail with poise and wisdom, for the time for reckoning is finally upon them.

In his latest review, Governor Worrell didn’t mince words, and instead painted a bleak picture of anemic growth, dwindling foreign reserves, widening fiscal deficit, growing (domestic) debt, weakening external sector, and a drop in tourism receipts. While the news itself did not come as a big surprise to most as some of trends highlighted have been progressively observed and predicted for a while now, I was rather surprised with the more direct (read honest) tone of the language, and especially with the realization and communication, for the first time in such reviews, of the need for a major adjustment, and a quantification of that adjustment (around $ 450 million according to the Governor). To illustrate this point, I prepared below 2 word cloud visualizations for the transcripts of the latest 2 quarterly economic reviews, to examine, via side-by-side comparison, if this change in tone and urgency can be visually observed. If you’re not familiar with word clouds, the bigger the size of the word, the more frequently it appears in the transcript. Click on picture for enlarged view.

barbados word cloud

Sure enough, while the March 2013 review focused more on issues of debt, taxes, and spending, the June review saw words like reserves and growth take further prominence. The most interesting finding I observed was the creeping up of the word “major” in the June review in much higher frequency, like a sort of a subliminal message to the readers alerting them of the fact that the situation is on the verge of something dramatic, both in realization and in the scope of the solution needed. This marks a departure in tone and style of communication that tended previously to downplay major risks and offer a reassuring tone to readers, almost to the point of false security. To be fair, the job of Governor Worrell as gatekeeper of macro stability and bearer of the message (no matter how bad the message) is not an easy one: One has to balance between an accurate transmission of a message in a way not to cause undue worry or panic. In this case, I was glad to see a deliberate shift towards more honesty and transparency, as required by the rapidly deteriorating situation.

I was most particularly troubled by three deteriorating indicators: negative GDP growth, a widening fiscal deficit, and a rapid loss in foreign exchange reserves.

macro

With a high public debt burden of over 100% of GDP, Barbados simply has to “grow out” of debt and start deleveraging by stimulating growth and reducing its fiscal deficits, and hence its future funding needs. The fact that Barbados has been running increasing budget deficits and not able to grow will act as an accelerator for debt accumulation, which will knock the debt trajectory further outside its sustainability zone. As for foreign reserves, they constitute Barbados’ last line of defense for the much prized fixed exchange rate regime against the USD.
I’m worried about these two trends because, with further deterioration, they both lead to the same outcome (financial insolvency), albeit via different paths: as I said above, spiraling fiscal deficits, coupled with low or no growth, will increase the future borrowing needs of Barbados, which will force the country to seek financing outside its domestic market (due to its saturation). This external financing will become increasingly more costly both relative to domestic financing and to previous external financing, as the perception of loose fiscal discipline get cemented in the mind of international (non-multilateral) investors, who would then require a higher premium on their lending to compensate for the increased credit risk. This would ultimately start a downward spiral of rising borrowing rates and rising borrowing needs, similar to what Greece and Portugal experienced, leading to financial bailout to starve off bankruptcy. Similarly, a rapid loss in foreign reserves will force the government to do one of two things: seek financial assistance or abandon the currency peg, both unsavory solutions.

But let’s take a quick diversion and talk about currency devaluation, something that pundits both within and outside Barbados have been identifying as a possible (or inevitable) solution. Devaluating the local currency can be achieved either by adjusting the rate at which the currency is pegged to the foreign currency of choice, or abandoning the fixed exchange rate regime altogether and allowing the exchange rate of the local currency to float and be determined by supply and demand. For Barbados, both cases will likely result in a significant loss of purchasing power of the Barbados dollar, since it will be worth less in foreign currency terms. Would this be a good or a bad thing for Barbados? First, in a country that relies on importing the majority of its basic necessities, the price of these imports will be higher in local currency terms. By contrast, Barbadian exports will be worth more, but we all know Barbados does not produce and export many goods besides rum and pepper sauce. However, Barbados does “export” a valuable service to the world in the form of tourism: a weaker Barbados dollar will make the tourism industry more competitive and could attract more tourists, especially from the US. The hope is with a more revitalized tourism sector, more employment can result and growth can be spurred again. The question then becomes, will the effects of an improved tourism sector outweigh the higher import costs associated with a weaker currency? The answer to this question would determine if Barbados comes out a net winner or loser from devaluation. One thing is sure though: the immediate effects of devaluation include higher short-term, uncertainty-induced inflation, which could cause large economic distortions before things settle down again.

All is not lost for Barbados however, and every problem has a solution out there. I don’t doubt for a second that policymakers in Barbados are able to pinpoint the problems and devise solutions. The problem, as is often the case in public policy, is the social cost of implementation and political leadership. So what would a reasonable roadmap for the immediate and longer-term future look like? Concerning fiscal management, and just like when one needs to tackle high credit card balances, one needs to work extra hard at work in hope of a promotion, or even get a second job to supplement income, while reducing discretionary spending and limiting the use of the credit card to bare essentials. Savings generated will allow for faster repayment of debt. The situation is analogous in the case of governments: restoring fiscal discipline requires measures both on the revenue and expenditure side, and there is room for both in Barbados. Here, the usual culprits spring to mind: on the revenue side, there is a clear need to stem the revenue leakage emanating from VAT and tax discretionary waivers and loopholes, which by some conservative estimates account for about 25% of total tax revenues, and in a country where tax revenue represent 95% of total revenues, the stakes become significant. In essence, it’s the whole tax framework that needs reviewing (and this does not necessarily translate into higher tax and VAT rates as most people think). The bigger battle resides in the expenditure side, with much room to reduce spending on stalwart silos of financial waste as the transportation board, public pensions, the public wage bill, and the tertiary education sector. Like it or not, these spending areas are generous by any standard, and would need to be adjusted in one form or another. Again, the common misconception is that this would translate into loss of jobs in the public sector, which is not necessarily true. For example, the size of the public workforce can be allowed to shrink by natural attrition without replacing retiring public servants with new ones, and pension benefits can be harmonized and re-allocated in a more efficient manner.

A quick look at the government’s recent Growth and Development Strategy 2013-2020 confirms that, indeed, these and other beginnings of solution are currently being investigated and programmed. The Government is not as blind or irresponsive as one would like to think, as one would seem to think that this time, the adjustment effort is radical and for real. In fact, the government is proposing a fiscal effort that would effectively half the current fiscal deficit from over 9% to 4.4% in 2013/14, which would seem on the face of it like a herculean effort. Can it be done in one year? Surprisingly, it has been done the same way not once, but twice in the past 7 years (see graph on fiscal balance above): immediately before the 2008 crisis and again in 2011/12. The effort was however inconsistent and short-lived. A major prerequisite for the success of this roadmap is thus a high level of consistency and discipline, coupled with higher than usual political leadership to enhance political ownership of the roadmap, and help “sell” what amounts to a tough medicine pill to swallow to a weary and skeptical audience. Additionally, a rather high level of frontloading of fiscal adjustments and broad-based reforms is needed to provide the system with a sizeable positive jolt.

What do you do when the day of reckoning is upon you? Well, you reckon. Staring into an abyss can lead you to do two things: panic and jump, or pause and assess your options knowing that what’s coming can be infinitely more devastating and painful. Staring into the abyss can be somewhat reassuring if you somehow believe you can fly, but you have to be honest: in a world of lies and liars, the most dangerous lie is the one you tell yourself.

JAMAICA’S PUBLIC DEBT – A CASE STUDY IN DEBT EXCHANGE OPERATIONS

Here’s a prezi I made for a talk I gave at the Caribbean Development Bank in Bridgetown-Barbados last February on Jamaica’s public debt, and more specifically the lessons learned from the 2010 debt exchange operation. In hindsight, it certainly looks now that the exchange was a missed opportunity to reduce the debt burden, as the latest indications show a full-circle return to pre-exchange debt dynamics for Jamaica.

-Samer