The slowdown in inflation, combined with the probable rise in the implicit interest rate and the maintenance of a high deficit, could create conditions conducive to activating the snowball effect of interest on Walloon debt, the Court of Audit warned on Monday.
At present, however, because of the historically low-interest rates that prevailed until the beginning of 2022, the implicit interest rate on direct regional debt (i.e. 1.34% in March 2023) is still well below the rate of inflation (9.6% in 2022 and 4.1% in 2023), notes the Court in its annual report to the Walloon Parliament.
Consequently, despite the existence of a large deficit and the slowdown in economic growth, this situation makes it possible to avoid the harmful consequences arising from the activation of the snowball effect of interest on the debt.
"However, the slowdown in inflation, which is expected to fall below 2% from 2025 onwards, combined with the probable rise in the implicit interest rate due to the increase in reference rates on the financial markets in 2022 and 2023 and the forecast maintenance of a high deficit, could create conditions conducive to the activation of this snowball effect", warns the audit institution.
The Walloon Region's direct debt stood at €23.1 billion at the end of 2022 (compared with €9.8 billion at the end of 2017), due to recurring budget deficits, heavily burdened by the consequences of the health crisis, the floods in July 2021 and the war in Ukraine.
In addition to direct debt, the Walloon Region also has to bear indirect debt of €11.4 billion (institutions included in the Region's scope of consolidation and various loans). At the end of 2022, the consolidated gross debt (direct + indirect) will therefore reach €34.5 billion.
This means that repaying all of the regional entity's debt would require spending twice the total annual revenue.
As for the Wallonia-Brussels Federation, at the end of 2022 it was carrying a consolidated debt of €11.6 billion, or almost the equivalent of its annual revenues.
The cost of this debt (the interest paid each year, editor's note) amounted to €191.8 million in 2022, or 1.3% of the entity's expenditure.
For the Court of Audit, the FWB's financial situation is not hopeless, but it would be prudent to reduce recurrent deficits.
"The sustainability of the French Community's debt depends mainly on its ability to control its future budget balances, and therefore to limit recourse to new borrowing. If policy remains unchanged, however, the trajectory observed over the last few years is likely to continue, with budget balances remaining in deficit", it concludes.
