Easing government debt will need fiscal adjustment: Fitch

By NST Business  - May 21, 2021 @ 10:23am

KUALA LUMPUR: Government debt worldwide will continue rising in 2021 and 2022, reaching a forecast US$95 trillion next year, according to Fitch Ratings.

This would come about as policymakers remained focused on responding to the economic consequences of the Covid-19 pandemic and its aftermath, the firm said.

Fitch said fiscal support in many developed markets additionally was directed at aligning medium-term recoveries with broadly defined sustainability objectives.

"Increases in debt have not been accompanied by concerns about debt sustainability except in some low-income sovereigns where preceding vulnerabilities have been exacerbated over the past year. 

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"Policy debates have largely centred on the cost advantages of low interest rates and the enhanced effectiveness of fiscal stimulus when rates are at or close to their lower bounds, as they are now," it said today.

Fitch believes there are risks in assuming the current interest rate environment will be sustained indefinitely, especially if government debt continues to rise. 

While some observers take comfort from interest rates being lower than economic growth rates in most countries, thus supporting a benign path for debt/gross domestic product ratios, there is limited empirical evidence that these conditions alone deliver lower debt ratios over time.

Fitch added that historical episodes of government debt reduction in developed markets were instead characterised by more mixed relationships between interest rates and economic growth. 

"More importantly, the shared experience of almost all debt-reduction episodes is that governments run primary surpluses. 

"In Fitch's view, the future will be much like the past in this regard, and government debt reduction will eventually require fiscal adjustments to better align primary balances'l it said.