As Covid-19 spreads, causing more countries to take counter-measures, Central and Southeast Europe is no exception. ING’s latest report said that collectively it is downgrading the 2020 GDP outlook on the back of virus fears.
The estimates of the International Monetary Fund (IMF), prepared on the basis of data available in the second week of April, indicated that globally the direct budgetary costs associated with health care expenditures, as well as financial assistance in the form of subsidies or reduced taxation of businesses and individual social groups, will reach USD3.3 trillion. The expected global costs of the pandemic should also include the indirect budgetary expenditures in the form of loans and capital injections for an additional amount of USD1.8 trillion. Additionally, the calculation of the global costs associated with the coronavirus pandemic should also take into account the amount of USD2.7 trillion in further possible expenditures resulting from budgetary guarantees and other forms of public support targeted at the liquidity of businesses and household budgets. Still, this is certainly not the full cost that will be ultimately borne in connection with the pandemic. The United States fiscal authorities announced that they would be forced to borrow a record-high amount of USD3 trillion in the Q2’20, which is equivalent to more than one-tenth of the current overall public debt of the United States.
A dramatic expansion of the budget deficits and the entire public finances will be the first and most immediate consequence of the soaring costs of the fight against the coronavirus with budget revenues decreasing for the same reason.
The IMF has traditionally divided the world into three groups of countries: Advanced Economies; Emerging Market and Middle-Income Economies in Europe and Asia (this group also includes Poland); as well as Low-Income Developing Countries. According to IMF estimates, globally the general government fiscal deficit will grow by 6.2 percentage points, from 3.7 per cent to 9.9 per cent of global GDP. The general government deficit will increase the most in the most developed countries: from 3.0 per cent to 10.7 per cent. In the case of Emerging Market and Middle-Income Economies the deficit is expected to increase from 4.8 per cent to 9.1 per cent of GDP. In the economically weakest nations, mainly in Africa and Asia, the general government deficit will increase by much less on average, growing from 4.1 per cent to 5.7 per cent.
According to the estimates of the IMF, only a small group of countries will maintain a positive general government fiscal balance this year despite the coronavirus pandemic. These include the Republic of the Congo (5.7 per cent), Qatar (5.2 per cent), and Norway (0.8 per cent), where the general government fiscal balance will deteriorate considerably due to increased spending on health care but it will still remain in the positive territory. In Qatar, the public finance surplus should even grow from 4.1 per cent to 5.2 per cent of GDP, despite the sharp decline in oil prices.
According to the IMF, in Poland the current deficit of the public finance sector (based on the methodology applied by the European Union) will increase from 0.7 per cent in 2019 to 6.7 per cent in 2020. However, in reality it will most likely end up being even higher. In late April, the Polish government approved the latest Update of the Convergence Program, which is prepared each year for the European Commission and the Economic and Financial Affairs Council of the European Union (ECOFIN). In that document it was estimated that the public finance deficit in Poland would reach 8.4 per cent this year. Meanwhile, in the spring economic forecast the European Commission predicts that this year the general government deficit in Poland will increase to 9.5 per cent, while the general government debt will rise to 58.5 per cent of GDP.
The higher current public sector deficit will increase the levels of public debt almost everywhere in the world. In the opinion of the IMF, in net terms — that is, taking into account the countries’ assets — global public debt will increase from 69.4 per cent in 2019 to 85.3 per cent in 2020.
Due to issues of cross-country comparability, and the difficulty in assessing how liquid the assets held by individual countries are, gross debt ratios are more commonly used in statistics. These data are also used, among others, by the European Commission as part of the Macroeconomic Imbalance Procedure, which was introduced in 2011, after the previous global economic crisis. This procedure involves an assessment of the degree to which member states fulfil the jointly adopted prudential criteria. One of the criteria is the level of the government gross debt. According to the IMF, the government gross debt in the world will increase from 83.3 per cent of global GDP in 2019 to 96.4 per cent in 2020.
The general government gross debt will increase the most in the countries where it is already the highest, that is, in the wealthiest nations with highly developed market economies, including those belonging to the G20. In the entire group of countries with developed economies, the average level of government gross debt will increase from 105.2 per cent of GDP in 2019 to 122.4 per cent of GDP in 2020. One of the most extreme examples among these countries is Japan, where the government gross debt will grow by 14.5 percentage points this year, from 237.4 per cent of GDP in 2019 to 251.9 per cent of GDP in 2020.
This year, the strongest growth in gross public debt among advanced economies will be recorded in the United States (an increase of more than 20 percentage points), Greece, Canada, as well as Italy and Spain, which have been hit particularly hard by the coronavirus pandemic. Meanwhile, gross public debt in Germany will increase from 59.8 to 68.7 per cent. According to the IMF, Norway is the only European country where public debt will decline this year (from 41.3 per cent of GDP in 2019 to 40.0 per cent in 2020).
The situation is somewhat more complex in the poorest, mainly African countries. Sudan will record the highest increase in public debt in the world (its debt will grow by 94.9 per cent), but we must remember that this country has been torn by a civil war — still ongoing — for many years. Sudan, Somalia, Libya, and Yemen, and, in part, also Venezuela, are all countries which have suffered due to deep internal crises. Even though they are included in the international macroeconomic and financial statistics, the reliability of the available data is highly questionable.
The less wealthy, as well as the poorest countries, generally cannot afford to maintain levels of public debt as high as those easily serviced by the most affluent countries. Consequently, they also cannot afford to implement programs supporting the economy in light of the coronavirus pandemic that would be as large as those implemented by the rich countries. As a result, in those poorer countries the level of gross public debt will also rise this year, but the increases will be much more moderate. In the European and Asian emerging market countries, the level of debt will increase from an average of 53.2 per cent of GDP in 2019 to 62.0 per cent of GDP in 2020. In countries with the lowest incomes, debt levels will increase from an average of 43.0 per cent of GDP in 2019 to 47.4 per cent of GDP in 2020.
Given that country’s importance for the overall situation of the world economy, it is worth noting that according to the IMF this year China’s public debt will rise from 54.4 to 64.9 per cent of GDP. Some economically important countries in which the pandemic will not contribute to a significant increase in the level of public debt include Singapore (an increase in public debt by 1.1 percentage points) and India (an increase in debt by only 2.4 percentage points).
In the case of Poland, the IMF predictions are pessimistic, but the projected level of public debt should nonetheless stay within the adopted constitutional and statutory limits (a threshold of 60 per cent of the country’s GDP). According to April’s predictions gross public debt in Poland could increase by as much as 7.2 percentage points, from 46.7 per cent of GDP in 2019 to 53.9 per cent of GDP in 2020. This increase would result, to a far greater extent, from the rise in budgetary expenditures than from the reduction in the previously planned budget revenues. The IMF predicts that in 2021, the level of gross public debt in Poland will decline to 53.5 per cent of GDP.
In a more recent forecast of Poland’s Ministry of Finance, included in the Update of the Convergence Program, which has already been approved by the Polish government, it is predicted that this year public debt in Poland will rise to 55.2 per cent of GDP. However, in the opinion of some banking sector analysts, the debt level could get close to the constitutional limit of 60 per cent of GDP.