Could someone please help me out please… CFAI makes a number of comments in this reading regarding emerging markets. …Comment below…(relevant checklist question proposed by CFAI) …fiscal debt to GDP… > 4% is a concern (fiscal policy) …deficit > 4% of GDP probably uncompetitive…(competitiveness) …small current account deficit on the order of 1-3% of GDP is probably sustainable (competitiveness) …ratio of foreign debt to GDP > 50% is dangerous…(external debt) Does the term fiscal debt have the same meaning as deficit? Is deficit (comment 2) the same as current account deficit? Can foreign debt (debt owed by private sector and govt combined) be >50%? E.g. If the emerging country has fiscal debt equal to 3% of GDP. Is it possible that including external debt of the private sector sector could increase the foreign debt to 50% of GDP? Any help would be greatly appreciated.
1)Debt and Deficit are two different terms. 2)Deficit keep on adding every year to make substantial debt 3)Two ratios are important debt/GDP and deficit/DP 4)Current account deficit= Govt. Budget Deficit + private sector deficit 5)Govt Budget deficit increase in recession since outflow(fiscal stimlus) is more than inflow( tax revenue). 6)Hence Govt has to borrow from foreign investors.That adds to debt and deficit. 7) Too much borrowing is problem . deficit/GDP>4% and debt/GDP>50% can be unsustainable in long run. 8) Current problems in Greece is good example of all these factors.
High fiscal deficit to GDP ratio means that Govt. is on a spending spree funded by borrowing and there may not be enough monies to borrow for private corporations (crowding out). Real interest rates may rise effecting competitiveness and growth of economy. Also what matters is where Govt. is spending the borrowed money? To build infrastructure or to pay salaries to its bloated work force? Fiscal deficit may not be bad after all if it contributes to infrastructure development and competitiveness; private partnership may as well turn out another alternative. Current account deficit / net imports may improve efficiency in long run if you are importing capital goods, technology etc. Additional concern for foreign debt is adverse currency movements.
Thanks very much for the prompt and thoughful response, it was very much appreciated.