The World Bank has dispatched a warning alert to world economies signaling imminent global debt crises that could results in unprecedented financial instability for most countries.
In its latest Global Economic Prospects (GEP) the Washington-based global lender says of the four waves of debt accumulation since the 1970s, the latest was the largest, fastest and most broad-based, mirroring the biggest buildup in borrowing in the past 50 years. “The size, speed, and breadth of the latest debt wave should concern us all,” said World Bank Group President David Malpass. “It underscores why debt management and transparency need to be top priorities for policymakers, so they can increase growth and investment and ensure that the debt they take on contributes to better development outcomes for the people.”
According to the Bank, signs are unavoidable and clearly visible that, there could still be a financial crisis even though historically low interest rates were making debts more manageable. “Low global interest rates provide only a precarious protection against financial crises,” said Ayhan Kose, a World Bank official. Kose says the history of past waves of debt accumulation shows that these waves tend to have unhappy endings. “In a fragile global environment, policy improvements are critical to minimize the risks associated with the current debt wave.” She said in the GEP.
Total emerging and developing economy debt reached almost 170% of gross domestic product in 2018 or $55 trillion, an increase of 54 % of GDP since 2010. China the world ‘s second largest economy after the United States accounted for the bulk of the increase in part due to its size but the build-up was broad-based, and included other big emerging economies such as Brazil.
The World Bank says financial turmoil in emerging and developing economies was one of the threats to its forecast of a slight strengthening of global growth this year, from 2.4% to 2.5%. The Bank’s Global Economic Prospects further says modest pick-up in activity would depend on a better year for some of the large emerging economies such as Argentina, Mexico and Turkey that struggled in 2019.
However the Bank stressed there were downside risks to its forecast. “This rebound is not broad-based; instead it assumes improved performance of a small number of large economies, some of which are emerging from a period of substantial weakness. About a third of emerging market and developing economies are projected to decelerate this year due to weaker-than-expected exports and investment.
The Washington headquartered global financier says major concern is that countries could be borrowing excessively stem from the recent history of financial distress, with each crash preceded by an accumulation of debt. The build-up since 2010 had been concentrated in emerging and developing countries rather than in advanced nations. In about 80% of emerging and developing economies total debt was higher in 2018 than in 2010 and the World Bank says there has been “navigating dangerous waters” because the current wave of borrowing had coincided with a decade of repeated growth disappointments.
Heavily indebted countries were now confronted by weaker growth prospects in a fragile global economy. By in large debt is said to be rising among emerging countries, in contrast with previous episodes such as the 1980s Latin American debt crisis when the debt build-up was region specific. More than a third of emerging and developing economies had experienced an increase in debt of at least 20 percentage points of GDP. In addition, debt accumulation had been in both the public and private sectors, which contrasted with past waves when the build-up was either by the government or private firms.
The World Bank says countries should seek to reduce the likelihood of crises and lessen their impact should they materialize by building resilient monetary and fiscal frameworks, instituting robust supervisory and regulatory regimes, and following transparent debt management practices. “However, high debt carries significant risks for emerging and developing economies, as it makes them more vulnerable to external shocks , the rollover of existing debt can become increasingly difficult during periods of financial stress, potentially leading to a crisis,” warns the global lender
Global Economic Growth
The World Bank’s Global Economic Prospects also noted that Global economic growth is forecast to edge up to 2.5% in 2020 as investment and trade gradually recover from last year’s significant weakness but downward risks persist. Growth among advanced economies as a group is anticipated to slip to 1.4% in 2020 in part due to continued softness in manufacturing. Growth in emerging market and developing economies is expected to accelerate this year to 4.1%.
The World Bank says following a year during which weak trade and investment dragged the world economy to its feeblest performance since the global financial crisis, economic growth is poised for a modest rebound this year. However, for even that modest uptick to occur, many things have to go right.
Emerging market and developing economies are anticipated to see growth accelerate to 4.1 percent from 3.5 percent last year. However, that acceleration will not be broad-based: the pickup is anticipated to come largely from a handful of large emerging economies stabilizing after deep recessions or sharp slowdowns. World Bank Group Vice President for Equitable Growth, Finance and Institutions, Ceyla Pazarbasioglu says even this tepid global rally could be disrupted by any number of threats. “Trade tensions could re-escalate”.
Pazarbasioglu added that a sharper-than-expected growth slowdown in major economies would reverberate widely. “A resurgence of financial stress in large emerging markets, an escalation of geopolitical tensions, or a series of extreme weather events could all have adverse effects on economic activity.” He said
The World Bank economists further observed that even if the recovery in emerging and developing economy growth were to take place as expected, per capita growth would advance at a pace too slow to meet development goals. The Bank pins reform hopes on leaders noting that policy makers have it in their capacity to ensure the recovery not only stays on track, but even surprises to the upside. The World Bank official says recent policy actions particularly those that have mitigated trade tensions could augur a sustained reduction in policy uncertainty.
Countries could pursue decisive reforms to bolster governance and business climate, improve tax policy, promote trade integration, and rekindle productivity growth, all while protecting vulnerable groups. Building resilient monetary and fiscal frameworks, instituting robust supervisory and regulatory regimes, and following transparent debt management practices could reduce the risk of shocks, or soften their impact, and strengthen resilience against them.
“With growth in emerging and developing economies likely to remain slow, policymakers should seize the opportunity to undertake structural reforms that boost broad-based growth, which is essential to poverty reduction,” said World Bank Group Vice President for Equitable Growth, Finance and Institutions, Ceyla Pazarbasioglu
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”