Covid-19’s $ 24 trillion cost (so far) means the economy will never be the same
Happy are the young, said Herbert Hoover, for they will inherit the national debt.
Hoover’s observation has new relevance 88 years after Donald Trump’s ignominious exit from the White House. Not only because the United States just had contact with the Depression of the 1930s which her downsides helped to make “great”. But because the unborn children will pay off the debt of the Covid-19 era that is increasing before our eyes.
It is not a moral or ideological observation. Really, what can governments do besides budget deficits as growth collapses and unemployment rises? Yet here in Asia, it’s worth asking how the legacy of all this debt affects public spending on education, health, infrastructure, and policies to increase innovation and productivity.
The numbers are already staggering. From what governments around the world admit, pandemic rescue measures have $ 24 trillion to the mountain of global debt in 2020, pushing IOUs to a record $ 281 trillion.
It certainly makes you wonder if, say, the Covid-19 variants are smarter than vaccines, the global economy will be too big to fail or too big to save. Or in the case of developing Asia, too big to avoid underfunding investments in future generations to avoid the “middle income trap” and social unrest.
In a new report, the International Institute of Finance highlights Asia’s role in this borrowing frenzy among emerging economies. Overall, the IIR notes, developing countries’ debt-to-gross domestic product ratios exceeded 250% in 2020, up from 220% in 2019.
In emerging Asia, the debt-to-GDP ratio exceeds 298%, compared to 266% at the end of 2019. China, South Korea and Thailand find themselves with the dubious honor of being among the top five economies with the largest increases in year after year. Here, India also deserves attention, reporting a 17.3% jump in its public debt ratio.
Overall, however, Asia has experienced many of the largest increases in the debt-to-equity ratio among emerging economies in the general government, non-financial business and household sectors year-over-year over the years. of the last three months of 2020.
There are many ways that all of this borrowing complicates The future of Asia.
One is increased vulnerability to a repeat of the 1997-1998 crisis, which had its roots in excessive borrowing. Another: as debt servicing costs rise, there is less money to spend on cost-effective hardware (roads, airports, power grids) and low-cost software (education, training, public health) that will harm the economy. long-term competitiveness. Finally, crowd out the capacity of the private sector to finance new growth opportunities.
IIR economist Emre Tiftik worries about “corporate zombification.” As the global recovery accelerates, he notes, “governments will develop exit strategies from exceptional budget support measures.”
To date, government guarantees and moratoriums on debt payments have succeeded in preventing an upsurge in corporate bankruptcies. The decline in the number of companies filing for insolvency in many European countries was amazing.
Yet, warns Tiftik, “The premature withdrawal of government support measures could mean an increase in bankruptcies and a new wave of non-performing loans, with implications for the financial stability of the banking sector. However, a sustained reliance on government assistance could also present systemic risks to the financial system. A prolonged period of loan guarantees, coupled with low and sustained interest rates, may well encourage the accumulation of even more debt by weaker and more indebted companies.
Here, Japan’s experience these last 30 years deserve to be taken into account. Tokyo shows that even in the pre-coronavirus era, it can seem impossible to unwind hyper-aggressive government loans and ultra-low interest rates. Extraordinary stimulus efforts tend to normalize quite quickly. Banks, businesses, consumers and, of course, politicians are getting used to free money.
It can institutionalize complacency. As Korea University economist Lee Jong-Wha points out, declining growth poses fiscal sustainability challenges. Among emerging and middle-income Asian economies, he notes, the International Monetary Fund expects fiscal positions to continue to deteriorate The Asian Development Bank has also said this trajectory will be difficult to reverse over time.
“At the same time,” says Lee, “increased liquidity stimulates risk appetite, causing asset prices to rise rapidly. Already, some East Asian countries, including South Korea and China, are struggling to contain real estate bubbles in major cities, despite tighter mortgage rules. And some analysts have warned that a market correction is imminent, while others argue that low real interest rates and the growth potential of the tech sector justify today’s high stock prices.
In this context, adds Lee, “expectations of normalization of fiscal and monetary policies following the resurgence of growth and inflation could push world stock prices down. And a large-scale withdrawal of liquidity in emerging market economies could spell disaster for Asian economies that are highly exposed to short-term inflows of foreign capital. “
Admittedly, it is not an easy challenge. The last eight decades and more since Great Depression taught policymakers not to tighten fiscal policy, Hoover style, in a low growth environment. Yet it is also essential to find a way out of an unsustainable stimulus and to know how and when to implement it.
“The biggest challenge is to find a well-designed exit strategy from these extraordinary tax measures,” Tiftik said.
It’s easier said than done. Braking too soon risks lower living standards across Asia, especially as governments put back the safety nets of the Covid era. Wait too long and leaders across this region will pass the bill for 2020 to their grandchildren. And a future in which soaring global yields this week is all too common a threat.