Ksenia Yudaeva: National debt - vice or virtue?
Statement by Ms Ksenia Yudaeva, Deputy Governor of the Bank of Russia, at the Gaidar
Forum 2016 "Russian and the world - looking to the future", panel discussion "National debt -
vice or virtue?", Moscow, 13 January 2016.
* * *
Before starting the discussion I would like to say a few words about the current market
situation. Following the 2008-2009 crisis, bursts of volatility can occasionally be observed
in global markets. The reasons are different: debt crisis in the peripheral eurozone countries,
changes in the US Fed's policy, changes in the structure and strategies of the oil market
players or, as in the past six months, the situation in the Chinese market. Anyway the bursts
of volatility relate to the adjustment of global imbalances, which have been piling up for years,
and they are inevitable to a certain extent. This is a part on the new reality we are living in.
Given the situation, the Bank of Russia's main task is to stabilise the Russian economy
amid external shocks, create conditions for its quick adaptation to the new environment while
retaining high price stability, and macroeconomic and financial stability in general, and
henceforth maintain basic conditions for economic growth.
If we turn to the situation in the Russian markets, we can see that recently it has been
rather stable despite global volatility. There are no problems with liquidity and other risks
to financial stability. Risks related to the corporate debt burden are under control. The Bank
of Russia is monitoring financial stability, promptly and regularly adjusts its macroeconomic
forecasts and its policy. The central bank is prepared to use all available instruments
to stabilise the situation in case of need.
However, in order to maintain macroeconomic stability we need not only a balanced policy
pursued by the central bank, but also the appropriate fiscal policy, including the government
debt management policy.
The national debt in national currency is a basic financial instrument for any country
of the world. It plays a leading part in the financial markets, is actively used by central banks
in their monetary policies, as well as in banking and financial regulation. This is the role
of a risk-free liquid asset, as we conditionally call it. The rates on other riskier assets are
usually calculated with due account of the risk premium to government debt. As distinct from
short-term interest rates regulated by central banks, long-term rates in the economy depend
on inflation expectations and expectations with regard to government finance
sustainability.
The 'risk-free' is a key word describing the relationship between the financial system and the
government debt. The latter may perform all these functions only if the state budget
is balanced in the medium and long terms and the government may honour its obligations
without resorting to defaults and the printing press. Budget discipline impacts the central
bank's ability to function as an economic and financial stabiliser amid economic shocks.
You may find a lot of examples in the Russian and international history. The Russian policy
19th
between the end of the century and the start of the First World War serves as a model
of how the balanced fiscal policy allowed the government to preserve national currency
stability, refrain from increasing taxes, and stabilise debt in per cent of GDP at the levels
acceptable to the market. At that time a sustainable economic growth persisted despite the
lost war with Japan and the revolutionary upheavals. (Vice versa, uncontrolled budget deficit
growth and in effect the breakdown of government finance during the First World War led
to an economic collapse and triggered the 1917 revolution.)
Let's turn to more contemporary examples. The development of the so-called emerging
markets, i.e. the financial markets of developing countries, started following the state budgets'
stabilisation and inflation reduction. Market uncertainty about fiscal stability may cause shocks
in the financial and FX markets. Both the situation in Brazil in recent months and the
Russian crisis of 1998 can serve as an example. Moreover, market concerns over the
consistency of the Bank of Russia's policy and our adherence to announced goals, which
we felt in 2014 and to a lesser extent in 2015, were also linked to the budget. All the theories
of the ruble exchange rate pegged to a certain ruble price of oil originated from
considerations of budget balance and concerns that the central bank would intentionally
generate inflation to finance budget liabilities. That is the Bank of Russia was suspected
of being ready to give up inflation targeting for the sake of budget replenishment.
It took us many months to persuade the market of the opposite.
Does Russia have a potential to build up government debt? Yes, it does, in theory, since
our country may boast one of the lowest levels of government debt. Consequently, the
development of the government debt market could be conducive to the development of the
financial system as a whole. Anyway I would proceed from the conservative assessments
of the maximum possible debt burden on the Russian economy, which does not pose a threat
to macroeconomic stability, say, no more than 25-30% of GDP. Anyway examples from the
Russian history show that the real interest rates the Russian budget has to pay, should the
government debt exceed 35-40%, became exorbitant and accelerated the debt spiral. Among
the negative outcome of government debt growth I may also call the ousting of corporate and
private borrowers by the state. By the way, the maximum permissible debt burden is higher
in the countries witnessing persistently low inflation and persistently low inflation
expectations. The long-term real interest rates in these countries are lower, which means that
debt burden limits are higher. This is another manifestation of interdependence between fiscal
and monetary policies: the more successful the central bank is in terms of securing
sustainable price stability, the larger is the room for manoeuvre used by the
Government to build up budget deficit and government debt to pursue a countercyclical
policy.
Actually, there is no choice whether the government debt is good or bad. Any medicine
can be fatal, or at least toxic, if overdosed. The same is true of the government debt: it can
easily turn out from a basis for the financial system development to its grave digger. This is one
of the reasons which cannot help being taken into account in shaping fiscal policy.
While assessing the size of potential development of the Russian debt market, one cannot
help taking into account several material risk factors. The first one is various
off-balancesheet budget liabilities, explicit and implicit ones. The case of Vnesheconombank shows
that they may be rather significant. Therefore, balancing federal budget alone without
accounting for debt accumulation by the regions is insufficient. Such factor as population
aging and the need to finance the growing costs of pension provision in the next five to ten
years cannot be ruled out either. The second factor is high uncertainty in the global
commodity markets, first of all, the oil market. This is another argument in favour of using
conservative scenarios. Finally, there is uncertainty with regard to the duration of the period
of low oil prices. But the total amount of the macroeconomically stable debt burden is,
unfortunately, an absolute value not depending on the period, during which the debt
is being accumulated. The lack of clear fiscal strategy in the future can destabilise the
markets already now.
Whether the government debt is good or bad, as I have already mentioned, is a sham question
to a certain extent. Another sham question is a choice between the financial stability and
economic growth. Both the central bank and the Ministry of Finance are being quite often
criticised for focusing monetary and fiscal policies respectively on the problem of financial
stability to the detriment of economic growth. In actual fact, economic growth is impossible
without financial stability. While a stable budget is the basis of financial stability. It is possible
to stake money, including government one, at the microlevel, at the level of small specific
projects. To take risks at the macrolevel means to endanger economic growth and social
stability.
An important question is how to finance the deficit: through reserves or through debt?
Strictly speaking, both options lead to growth in net debt (net of reserves) and consequently
to debt burden accumulation. That is why this choice is also a sham one to a large extent.
Nevertheless, since the commodity market risks are high, we believe that today the priority
should be given to debt financing and keeping reserves for more complicated scenarios,
when the access to debt financing is even more difficult. Moreover, no doubt that the available
reserves serve as an insurance from the market point of view and make the access to debt
financing somewhat easier.
In conclusion I would like to say a few words about how to reach the path of strong
economic growth amid tough monetary and fiscal policies and prudent build-up
of government debt. The matter is the structure of budget expenditure, rather than its
volume, and the use of structural reform potential. The external conditions push the
economy towards structural changes and balanced structural reforms may accelerate this
process and make it less painful. The emphasis should be put on those industries, which
turned out to be competitive in the current situation without government support. Only
they could become an efficient engine of development amid new reality. As it often happens,
the best way to help businesses in the current conditions is not to interfere. The deficit
resources of government support should be concentrated on assistance to the most vulnerable
population groups, as well as on the development of infrastructure and human capital.