Chapter 16

Public debt and debt management

Learning outcomes

• Define public debt• Describe salient characteristics of the size, composition,

and nature of public debt in South Africa• Explain and compare different theories of public debt and

evaluate them critically• Argue the relative merits of debt and tax financing of

government expenditure• Define public debt management• Identify and describe the different types of public debt

cost• Identify the goals of public debt management and discuss

their pursuance, with special reference to South Africa.

The concept of public debt

• Treasury bill• Government bonds• Zero-coupon bonds.

Public debt may be defined as the sum of all the outstanding financial liabilities of the public sector in respect of which there is a primary legal

responsibility to repay the original amount borrowed (sometimescalled the principal of debt) and to pay interest (sometimes called debt

servicing).

Public debt-GDP ration in South Africa

Period Public debt (year-end) as % of GDP, period average

1960 – 69 44.7

1970 – 79 39.7

1980 – 89 32.4

1990 – 94 41.1

1994 – 1999 49.0

2000 – 2004 40.9

2005 – 2009 29.0

2010* 33.5

* Preliminary figure Source: South African Reserve Bank, Quarterly Bulletin

Size and composition of the public debt• Debt trap• Ownership distribution• Current expenditure• Capital expenditure• Net worth• Net indebtedness• Consul.

The theory of public debt

• Inter-temporal burden• Domestic or internal debt• Foreign or external debt• Internal vs external debt and the burden on future

generations• Inter-temporal burden• Fiscal neutrality and Ricardian equivalence• Fiscal activism and Keynsian demand management• The crowding-out phenomenon• The public choice view.

The impact of public debt

The impact of public debt (continued)

Should the government tax or borrow?

• Allocation efficiency• Distribution (equity)• Macroeconomic stability.

Public debt management

Objectives• Minimisation of state debt cost• Macroeconomic stability• Development of domestic financial markets• Financial credibility.

Bonds and the cost of borrowing

• P = E/I

• Primary dealers or market makers• Government net worth• Mark to market• Discount price• Bond discount• Foreign exchange cost.

Yield curves of government securities

Types of yield curves

• Horizontal or flat• Negatively sloped or inverse• Upward sloped or positive.

Assessing credit worthiness

Two questions• Can the country service its debt?• Will the country service its debt?

Contingent liabilities

• Explicit– Government guarantees on foreign exchange borrowings

• Implicit– No contractual obligation to provide assistance but does so.

Thank you.