1. The main definition of debt used in this study is the sum of central government debt and the FIDF liabilities. This differs from the Government Finance Statistics (GFS) definition of government debt, which excludes the FIDF liabilities as they are considered to be part of the financial public sector liabilities. For analytical purposes, however, it is useful to include these liabilities in the definition of public debt, since the FIDF financial sector restructuring activity is of a fiscal nature and the FIDF liabilities are conceptually interchangeable with government debt (indeed around 10 percent of GDP in the FIDF losses have already been fiscalized). Consistent with GFS, other financial sector public debt, such as state bank liabilities or BOT debt, is excluded. Non-financial public enterprise (NFPE) debt is also excluded on the grounds that the NFPEs reportedly have substantial positive net worth, are largely profitable, and thus are unlikely to present a future fiscal burden. Moreover, depending on privatization developments, NFPEs could actually contribute to a reduction in government debt. The remainder of this annex describes the methodology used to project the various fiscal variables that contribute to the evolution of the debt ratio.
Prepared by Steven Barnett and Vikram Haksar.
For purposes of this study, the debt ratio is defined as the sum of central government debt and FIDF liabilities divided by nominal GDP (see Technical Annex for a further discussion).
With the exception of Thailand, the data in the figure are based on OECD definitions. For Korea this yields a debt ratio lower than estimates based on a definition more comparable to that being used to calculate Thailand’s debt (the OECD definition differs because it excludes the equivalent of FIDF liabilities and consolidates inter-governmental holding of debt).
The FIDF was established as a vehicle for channeling public support to the financial sector during previous crises, and after years of dormancy became active again at the onset of the crisis in 1997. It is an independent body within the framework of the BOT, and maintains separate financial accounts. It is overseen jointly by the BOT and MOF.
More details are provided in the Technical Annex.
The assumption that growth rates exceed real interest rates implies that the debt ratio would fall even if the government runs small primary deficits.
These projections assume that the distressed assets in the state sector are resolved over the next five years, including within the TAMC framework. However, the TAMC is envisaged to have an operational life of up to 10 years, such that the disposal process could in principle take longer than assumed here. As discussed in the Technical Annex, this would mostly affect the timing of the realization of costs, and not the long-term level of the public debt.
On the assumption that real GDP growth was lower by 3 percentage points per year relative to the baseline scenario (i.e., from 5–5½ percent to 2–2½ percent).
Since the interest rates in this exercise are expressed as averages applied to the stock of outstanding debt, a 3 percentage point increase is rather significant, especially in the near term, as it would imply a sharp up-tick in the interest rate on new debt.