Week in Review
What We're Reading:
April 22, 2021
Container prices surge in China and India as supply chain blockages tighten supply. The container shortages that have been adding to logistics logjams in Asia and beyond are showing few signs of being resolved. (HSN)
Russia to withdraw troops from Ukraine border, Crimea. The buildup had raised alarms in the West of renewed clashes in eastern Ukraine. (Moscow Times)
Central banks to pour money into economy despite sharp rebound. The aggressive rebound in global economic growth still isn’t enough for most of the world’s central banks to pull back on their emergency stimulus. (Bloomberg)
US ambassador to leave Moscow as tensions rise. John Sullivan’s departure will leave both countries’ embassies without their top diplomats at key moment. (Guardian)
India sets world record for new Covid cases with 314k infections. Fatalities rose by 2,104 in the past 24 hours, raising India's overall death toll to 184,657, the Health Ministry said. (CNBC)
EU economy 'on crutches,' warns ECB chief. Christine Lagarde has said Europe's monetary authority plans to keep interest rates and coronavirus stimulus unchanged. She urged EU members to get their coronavirus recovery fund operational with haste. (DW)
Retailers clamor for limited industrial space near major US seaports. Industrial markets at major U.S. port cities have come under additional strain from big increases in U.S. imports, fueling demand for warehouse space in markets with already scant availability, according to a new report. (AJOT)
China’s overvalued yuan seen adding momentum to global reflation trade. China’s yuan is overvalued, and that could end up stoking global inflation. (Business Mirror)
Over $200 billion wiped off cryptocurrency market in a day as bitcoin plunges below $50,000. Bitcoin and other digital coins plunged on Friday, wiping over $200 billion of the value of the cryptocurrency market. (CNBC)
Global container freight rates to moderate as ship orders rise. Global freight rates will remain high in the short term, but will moderate in the longer term once shipping supply-chain disruptions are cleared and more new ships are deployed, Fitch Ratings says. (HSN)
EU unveils AI rules, seeking global standards. Brussels has announced tougher rules to regulate the rapidly spanning field of artificial intelligence. Aspiring to catch up with China and the US, the EU hopes the regulation dispels myths surrounding the technology. (DW)
COVID reaches Mount Everest. A Norwegian climber became the first to be tested for COVID-19 in Mount Everest base camp and was flown by helicopter to Kathmandu, where he was hospitalized. (Economic Times)
8 steps to create strong disaster management plans. A core responsibility of any risk professional is planning for any possible disasters your business might face. (Risk Management Monitor)
Afreximbank, AfDB report reveals damage wrought by Covid-19 on banks’ trade finance business. Letter of credit business and correspondent banking relationships “slumped substantially” across Africa in the initial months of the Covid-19 pandemic, according to a new report from the African Export-Import Bank. (Global Trade Review)
Economic diplomacy: Supply chains, ASEAN wanes, and Japan’s coal dump. Will government have to pick a winner for 6G networks to show the US and Japan as “global leaders in innovation”? (Interpreter)
What is trade compliance? What does “trade compliance” mean? To understand, we first need to look at importing and exporting as a whole. Trade compliance hinges on protecting the physical safety of a country and citizens, as well as its economic security. (Shipping Solutions)
Politics of Frustration
Chris Kuehl, Ph.D., NACM economist
The rise of political populism is the rise of anger and frustration with nearly everybody. Neither the traditional parties of the center right nor the center left have been able to gain traction in election after election around the world.
The French population appears to lean center right in the polls, but there is no candidate from the center right that can garner support. In Peru, voting is mandatory, but upward of 20% of the ballot casting has been deliberately spoiled because voters want none of the above. Every major political party is struggling to hold itself together as extremists alienate traditional members and the majority of voters walk away in disgust over the incessant infighting.
The bottom line seems to be fear and frustration. Problems and crises seem to have utterly overwhelmed the people ostensibly in charge, whether they are from the left, right or populists themselves. The problems go deeper than the pandemic.
The reaction to COVID-19 was draconian—destroying the lives of millions as they lost jobs and business shuttered. The promise was that this pain would be short-lived. Remember the assertion of a rebound in May of 2020?
Sacrifices extended month upon month with no discernible gain. The virus kept spreading and killing anyway. Governments looked wholly unprepared and inept. It did not matter to angry populations that this was an unprecedented challenge and not enough was known. Frustration over the pandemic opened the flood gates to every other grievance.
Anger transpired over economic privation, migration, health care, social injustice, racism, sexism and many other isms. The populations of the world have been grasping at straws with the faint hope that some nostrum will work. More often, they simply support the person who is as angry as they are with no expectation that this leader can do better than any of the other politicians. The bulk of the global population is best described as disillusioned, and these are not easy people to lead in any direction.
|Blockchain Technology & Decentralized Finance
Speakers: Anjon Roy and David Wasson, SIMBA Chain
|NACM and FCIB Present Author Chat:
Leadership Reflections: 52 Leadership Practices in the Age of Worry
Author: Dr. Lisa M. Aldisert
|Regulatory Compliance 101:
What is regulatory compliance and why is it important?
Speaker: Chris Doxey, CAPP, CCSA, CICA, CPC, Doxey Inc.
|Global Expert Briefings - Trade Risk
Speaker: Jay Tenney, Trade Risk Group
Hungary: Fidesz Looking More Vulnerable
The PRS Group
A little more than a year remains before Prime Minister Viktor Orbán is required to renew the mandate of the right-wing government made up of his Fidesz and the smaller KDNP, which together control a majority of 133 seats in the 199-member National Assembly. Recent polls of voter preferences indicate that a six-party opposition alliance enjoys a slight edge over the incumbents, and Orbán has acknowledged that the upcoming election will likely present his coalition with its toughest challenge since he and his party were returned to power in 2010.
For their part, the main opposition parties are moving aggressively to cement their alliance, with the aim of being prepared to make a strong challenge, even in the unlikely event that Orbán were to opt for an early election. The incumbents’ ability to count on a strong economic performance to bolster Fidesz’s case for another term has been thrown into doubt by a recent surge in COVID-19 cases that at the very least will delay a strong post-crisis rebound. Against that backdrop, Orbán seems to have decided that stoking nationalist fervor by provoking conflict with the EU offers his best hope for securing another term.
To the frustration of his EU partners, Orbán has managed to thumb his nose at Brussels with near impunity, thanks to the protection afforded by the pledge of the similarly inclined conservative government in Poland to veto any move to impose sanctions on Hungary. However, the more liberal political forces in the bloc are actively seeking ways to limit Fidesz’s influence within multinational institutions and create a mechanism for blocking Hungary’s access to development funds.
Hungary and Poland have at least temporarily averted the danger that their access to EU funds might be jeopardized by a new requirement that conditions financing on upholding the rule of law, the legality of which is to be decided by the European Court of Justice. Vera Jourova, the European Commission vice president in charge of values, has suggested that a court ruling is possible by the summer, and she is preparing to implement punitive provisions within two months of confirmation that the rules are legally valid.
The possibility that Hungary might face restrictions on its access to EU funding ahead of the next elections creates a risk that Fidesz could suffer heavy losses in 2022. However, the incumbent coalition’s supermajority status means that even a serious electoral setback for Fidesz will not necessarily cost the party its majority status. Taking into consideration the potential for tensions within the fledgling opposition coalition to limit its ability to fully take advantage of Fidesz’s vulnerability, there is a 50% probability that the Fidesz-KDNP coalition will continue to control a majority in the 199-member Parliament beyond the next elections.
The analysis above is taken from the March 2021 Political Risk Letter (PRL). The best-in-class monthly newsletter, written by the PRS Group, provides concise, easy-to-digest briefs on up to 10 countries, with additional recaps updating prior month’s reports. Each month’s Political and Economic Forecasts Table covers 100 countries, with 18-month and five-year forecasts for KPIs such as turmoil, financial transfer and export market risk. It also includes country rating changes, providing an excellent method of tracking ratings and risk for the countries where credit professionals do business. FCIB and NACM members receive a 10% discount on PRS Country Reports and the PRL by subscribing through FCIB.
A Future with High Public Debt: Low-for-Long Is Not Low Forever
Marcos Chamon and Jonathan D. Ostry, IMF
Many countries are experiencing a combination of high public debt and low interest rates. This was already the case in advanced economies even prior to the pandemic, but it has become even starker in its aftermath. A growing number of emerging market and developing economies are likewise enjoying a period of negative real rates—the interest rate minus inflation—on government debt.
The IMF has called on countries to spend as much as they can to protect the vulnerable and limit long-lasting damage to economies, stressing the need for spending to be well targeted. This is especially critical in emerging market and developing economies, which face tighter constraints and associated fiscal risks, where greater prioritization of spending is of the essence.
But what should eventually be done about the high levels of public debt in the aftermath of this crisis? In an earlier paper, we showed that countries should not run larger budget surpluses to bring down the debt, provided fiscal space remains ample. Instead, they should allow growth to bring down debt-to-GDP ratios organically. More recently, the IMF stressed the need to rethink fiscal anchors—rules and frameworks—to take account of historically low interest rates. Some have suggested that borrowing costs—even if they move up—will do so only gradually, leaving time to contend with any fallout.
Two issues seem salient. First, will borrowing remain cheap for the entire horizon relevant for fiscal planning? Because that horizon seems to be the indefinite future, our answer here would be “no.” While some have argued that permanently negative growth-adjusted interest rates might be a reasonable baseline, we would highlight the risks around such a benign future. History gives numerous episodes of abrupt upticks in borrowing costs once market expectations shift. This risk is especially relevant for emerging market and developing economies where debt ratios are already high. At some point, debts may well need to be rolled over at higher rates. Limits to how much can be borrowed have not disappeared, and the need to stay well clear of them is even sharper in a world where interest rates and growth are uncertain.
Second, will it suffice to respond gradually to higher interest rates? Our answer again is “no.” Theory and history suggest when investors begin to worry that fiscal space may run out they penalize countries quickly. Market-driven adjustments are not necessarily gradual nor do markets only ratchet up the cost of borrowing once healthy growth returns—indeed, just the opposite seems plausible.
There are deeply engrained market expectations of negative interest-growth differentials (where real interest rates are less than growth rates) for most advanced economies. While long-term rates in the United States have been rising for the past several months, they remain low even by post-2008 standards. The chart below compares the Consensus Forecast for growth in the G7 economies with the real interest rate (10-year bond yield minus inflation) in 2030. The forecasts imply growth rates well in excess of real interest rates for all G7 countries except Italy.
But on the flipside, debt is getting closer to levels that were previously considered dangerous. Earlier we estimated debt limits beyond which the fiscal balance would not be able to adjust to market-driven increases in risk premia. These model-based estimates, built on a methodology later adopted by rating agencies in their own forecasts, reflect market conditions after the Global Financial Crisis but prior to COVID-19. Nevertheless, they are still informative by conveying what was perceived to be the debt limit as of a decade ago. This provides an indication of what could be expected if those previous conditions resurfaced. The bar chart shows how much of the estimated fiscal space (debt limit minus 2007 debt) was used from 2007 to 2019 (blue bars), and how much is projected to be used from 2019 to 2025 (orange bars). For some countries, the remaining fiscal space would not allow a response of a size comparable to what was deployed following the Global Financial Crisis or COVID-19—potentially constraining action in the event of another major shock.
At the risk of over-simplifying, we can consider three alternative views:
- Interest rates remain low in advanced economies even if debt continues to increase. In such a case, there is no need to worry about debt or steady (non-accelerating) deficits. The debt ratio would continue to rise but will eventually stabilize at a higher level.
- Interest rates are low at given debt levels, but they would not remain low if debt were to rise significantly. Most G7 countries can run a primary deficit close to 2% of GDP, while still stabilizing their debt ratios. In this scenario, they do enjoy a free lunch provided deficits remain below the debt (ratio)-stabilizing level.
- Interest rates are low but could adjust, perhaps abruptly. In this scenario, there is a case for taking advantage of favorable conditions to reduce debt and rebuild buffers. Even if the perceived risk is small, the large costs associated with forced adjustment could justify worrying about high debt and planning already for a riskier future.
What’s the moral of the story? It is indeed self-defeating to target a higher budgetary balance when the pandemic is not behind us. But that does not mean we should not worry about the consequences for debt paths, not least because markets may eventually worry, even if low borrowing costs now suggest those worries are far away. A prudent baseline is that borrowing costs might become significantly higher, especially for emerging market and developing economies. Then the task is to determine the fiscal policy needed to anchor expectations for a riskier future. Advanced economies with ample space may not need to worry much, but those with very high debt—where the reasons for low borrowing costs are imperfectly understood—might need to take some anchoring insurance. Emerging market and developing economies are likely to face more binding fiscal constraints and may need to adjust sooner (but again, not before the recovery is firmed up). All countries will need to anchor fiscal plans with some notion of sustainability, which can also attenuate the concern of a market repricing of risk. This is not tomorrow’s worry if fiscal space is uncertain and market expectations can turn abruptly. Laying out plans to anchor expectations should be today’s worry for all.
Reprinted with permission by IMFBlog.
Marcos Chamon is a deputy division chief in the Debt Policy Division of the Strategy and Policy Review Department of the International Monetary Fund.
Jonathan D. Ostry is deputy director of the Asia and Pacific Department at the International Monetary Fund and a research fellow at the Center for Economic Policy Research (CEPR).
Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations