Economic statistics - 01.11.1993, Side 6

real interest rate of indexed long-term Treasury papers in
the primary market are at a ten year low.
The nominal offer yield on Treasury bills and notes
on the secondary market has declined by 5 percentage
points from the beginning of the year to 5.75 and 6.0
per cent on 23 November. The average yield on
Treasury bills in transactions on the secondary market
was 10.5 per cent in January, but around 8 per cent in
August and 6.7 on average in November (until 23 Nov.).
The yield on Treasury bonds in transactions on the
Stock Exchange has also declined significantly. It was
7.7 per cent on average in January 1993 but 6.7 per
cent in August, and 5.33 in November.
Interest swap contracts
The operation of the banks and interest rate deci-
sions in particular, have been complicated by the fact
that price indexed liabilities (mainly deposits) have
been far bigger than indexed assets (mainly loans).
This mismatch has negatively affected bank profits
when the inflation rate has increased unexpectedly.
This has caused the banks to pay more attention to
short-term price fluctuations in their interest rate deci-
sions than desirable. Besides, this mismatch has prob-
ably caused interest rates to be at a higher level than
otherwise because of the risk premium it has entailed.
On 22 September, contracts on interest rate swaps
between the Central Bank on the one hand, and the
three commercial banks and the loan institution of the
savings banks on their behalf on the other hand, were
ratified. The purpose of the interest rate swap contracts
is to pave the way for interest rate reductions by first: to
insure the banks against unexpected fluctuations in the
inflation rate, and second: to encourage the banks to
gradually reduce the mismatch during the contract peri-
od, which lasts for 28 months.
The duration of the contracts is until 1 January 1996.
They imply that at the end of each four month period,
the Central Bank will pay the banks fixed interest on a
reference amount plus a price-increase compensation
according to the increase in the credit terms index from
the beginning to the end of that period. The banks will in
turn pay the Central Bank fixed nominal interests on the
same amount. The nominal interest rate is based on a
fixed indexed interest rate and a forecast for the credit
terms index over the period. The payments of the two
partners will cancel out if the forecast is realised. The
reference amount for the first period is based on an
assessment of the mismatch between indexed assets
and liabilities, but will be lowered by 1/7th atthe begin-
ning of each new four month period. This gradual
reduction will encourage the banks to reduce the mis-
match between indexed assets and liabilities over the
contracting period.
Thefirstfourmonth period lastsfrom September 1993
to the end of the year. The total amount of the four con-
tracts during the first period is approximately 2414 b.kr.
The price indexed interest rate in the contracts is 6 per
cent. The nominal interest rate is 8 per cent, since it is
assumed that the annual inflation rate measured by the
increase in the credit terms index from September to
January will be around 2 per cent. In this manner, the
operating risk of the banks, caused by unexpected price
increases during the contract period, will be reduced.
The Central Bank will, however, assume some risk, but
it is considered to be acceptable in the light of the over-
all gains from the contracts.
Public finance
Treasury finances are assumed to show a revenue
deficit of 12 b.kr. in 1993 on a cash basis, amounting to
3.3 per cent of GDP. The Treasury’s net borrowing
requirement is expected to be 14 b.kr, or 3.6 per cent of
GDP. The finances of local governments are expected
to show a revenue deficit amounting to 4 per cent, or
less than 14 per cent of GDP. The budget proposal for
1994 assumes a Treasury revenue deficit of 9.8 b.kr.
General government debt, i.e., the debt of central
government and local communities, is estimated to rise
to 196 b kr. in 1993, corresponding to 51 per cent of
GDP. The public sector net borrowing requirement for
1993 is assumed to be 26 b.kr. amounting to 6.7 per
cent of GDP. New saving is estimated at 27 b.kr. of
which 17 b kr. is expected to finance the borrowing
needs of the public sector.
These figures show that the credit demand is still
high, and that the Treasury deficit has to decline in
order to make the interest rate cuts sustainable and
make it possible to reduce interest rates further.
External debt
Although the net foreign debt is expected to remain
unchanged in real terms this year, or even decline
slightly, it will increase in relation to GDP. At the end of
last year, the net foreign debt was 49.6 per cent of GDP
and is projected at 58.6 per cent at the end of this year.
The debt ratio rises largely because of the depreciation
of the króna rather than as a result of an increase in
indebtedness. Also, GDP increases less in krónur
terms than the foreign debt. The debt service burden is
increasing in relation to export earnings. It was 26.2 per
cent last year and is expected to be 29 per cent this
year. The debt service burden grows because of a
decline in export earnings this year, and the shortening
of the maturity of the debt. It is therefore instructive to
look at the net interest rate burden in relation to export
earnings. The interest rate burden has stayed almost
flat since 1989 and is predicted to be 11.2 per cent this
year compared to 10.8 per cent last year and 11.4 in
1991.
Volume indices of net foreign debt and net
debt-to-GDP ratio