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Analysis .. The world is approaching the fourth wave of debt
February 09, 2020 03:07 PM
Mubasher - Ahmed Shawky : Amidst the World Bank warning of a massive wave of debt escalating all over the world, it is not clear who will be affected the most.
But if the countries most vulnerable to the brunt of the debt wave, from the UK to India, do not act soon, they may face severe economic damage, according to Kyushik Paseo, a former World Bank economist, through an analysis published by Project Syndicate.
Over the past decade, the global economy has seen a steady accumulation of debt, now reaching 230 percent of global GDP, with the fact that the last three debt waves have caused a major economic recession around the world.
The catastrophic past of debt
The first debt wave was in the early 1980s, after 10 years of low borrowing costs that enabled governments to expand their balance sheets considerably, interest rates began to rise, making debt service increasingly unsustainable.
Mexico was the first victim, as the US government and the International Monetary Fund were informed in 1982 that they could no longer pay their debts.
This had a domino effect, as 16 Latin American countries and 11 least developed countries outside the region eventually rescheduled their debt.
In the 1990s, interest rates were again low, raising global debt again.
The crash came in 1997, when the fast-growing but financially vulnerable East Asian economies - including Indonesia, Malaysia, South Korea and Thailand - experienced a sharp slowdown in growth and their currency rates plunged, thus extending effects to all parts of the world.
But emerging economies are not alone vulnerable to such meltdowns, as demonstrated by the 2008 US mortgage crisis.
By the time everyone discovered what the mortgage crisis meant, American investment bank Lehman Brothers had collapsed, causing the worst crises and recessions since the Great Depression.
The fourth wave of debt
The World Bank recently warned that the fourth debt wave may exceed in its first three waves, as emerging economies whose debt-to-GDP ratio reached a record low of 170 percent are particularly vulnerable.
As in previous cases, the debt crisis increases due to lower interest rates, while anxiety will start as soon as interest starts to rise.
The reality is that the mechanisms of such crises are not well understood, but research conducted by "Stephen Morris" and "Mortar Song Shin" in 1998 about the mysterious origins of currency crises, and how they are transmitted to other economies, shows that a "financial tsunami" can make the situation go beyond a source the crisis.
How the source of the financial crisis could fade has been illustrated in the delightful short story "Ranam Kurtva" by the famous Indian writer, Shibram Chakraborti.
In this story, the desperate Chipram asks an old school friend, Harsha, to lend him 500 rupees ($ 7) on Wednesday with a promise to pay the deposit the following Saturday.
But Chibram is wasting money, so when he comes on Saturday, he has no choice but to ask another school friend, Jopar, for a loan of 500 rupees, to pay it back next Wednesday.
Chipram uses the money to pay off his debts to Harsha, but when he comes on Wednesday he has no way to pay off Jopar’s debt, so he reminds Harsha that he paid off his debts on time and therefore borrowed from him again.
This becomes customary as Shibram repeatedly borrows from a friend to pay off his debts to the other, and Shibram then clashes with Harsha and Jobar one day.
After a moment of anxiety, Chipram proposes an idea that every Wednesday Harsha should give “Jopar” 500 rupees, and every Saturday the latter must give the same amount to the first.
Shepram assures his former friends at school that this will save him a lot of time and change nothing for them, and he will disappear in the crowds of the city "Kolkata" in India.
The UK and India are a model of the crisis
So who are the potential "Harsha" and "Jobar" in today's debt spree? According to the World Bank, they could be any country with domestic vulnerabilities, a large fiscal balance sheet, and a heavily indebted population.
There are many countries that fit this description and run the risk of becoming the channel that carries the fourth debt wave of the global economy.
Among the advanced economies, the UK is a clear candidate, and in 2019 Britain barely avoided recession, recording the weakest pace of growth in any period not seen since the 1945 recession.
Britain's conservatives have also promised big increases in commercial investment, and this is unlikely, but instead it will be a debt wave.
Among emerging economies, India is particularly vulnerable, as in the 1980s the Indian economy was somewhat protected, and consequently the debt wave had little impact at that time.
At the time of the East Asia crisis in 1997, India had just begun to open up and thus experienced some slowdown in growth.
By the time of the debt wave in 2008, the country had become globally integrated and severely affected, but its economy was strong and growing at almost 10 percent annually, and recovered within a year.
But India’s economy today faces one of the deepest crises of the past 30 years, with growth slowing sharply and unemployment at the highest level in 45 years, almost no export growth over the past six years, and per capita consumption in the agricultural sector over the past five years.
Add to this a highly polarized political environment, and therefore it is no wonder that investor confidence is rapidly declining.
It is not too late for countries to build "walls" to protect against the debt tsunami, while while India's political problems will take time to resolve, the new budget may be an opportunity to take precautionary action.
The fiscal deficit must be controlled in the medium term, but the government will be prudent in adopting an expansionary fiscal policy now, with funds directed to support infrastructure and investment, and if managed properly, could boost demand without increasing inflationary pressures and strengthening the economy in order to cope with the debt wave.
Deep differences stand in the way of approving the draft budget 2018 House of Representatives "Internet" Economy News Baghdad:
Large differences within the political blocs on the draft budget bill 2018, which will affect the economic policy of the government during the current year, according to specialists, expecting not to pass the budget in the coming days because of the intensity of the dispute between the decision-makers in the House of Representatives.
The Ministry of Finance instructed all ministries during the past month to cover their needs through the use of the approved exchange mechanism, which is 112 to face the non-adoption of the draft budget for 2018.
The parliamentary economic committee said that the non-adoption of the budget caused by the delay of the Council of Ministers to send a draft budget law and synchronized with the beginning of the legislative holiday.
The committee member, Najeeb Najib, said in a statement to "Economy News" that the reason for delaying the Council of Ministers to send the budget law to the House of Representatives, is the high oil prices have estimated the price of a barrel of $ 43 and now sold at $ 58, which prompted the government to reduce the deficit to 13 Trillion dinars after it was 23 trillion dinars.
Najib expressed her displeasure at the adoption of 12.6 percent of the province of the budget of 2018, saying at the same time that it was in accordance with the formula of "overwhelming".
She added that 12.6 percent is not enough to pay salaries in general, because the region needs 889 billion dinars a month to pay, while the ratio will provide 450 billion dinars only.
And on the losses resulting from the delayed adoption of the budget, the member of the Economic Committee, the losses are not large because the origin of investment expenditures set up for the establishment of service projects do not constitute more than 25% of the budget, most of which loans and some of them ratified in 2017.
Noting that the sovereign expenditure took a large part of the budget of 2018 to reach 45%, as well as the availability of degrees of employment but not able to cope with unemployment.
On the other hand, the Dean of the Faculty of Management and Economics, Mitham Laibi, in a statement to "Economy News" that "losses caused by delaying the adoption of the budget, will be based on the salary and salaries, because it is the first component of the budget, which weakens the investment side.
He added that the delay caused by the president of the conflict between the political blocs for the purposes of electoral propaganda and try each of them to review "political muscles."
"All political arguments have nothing to do with any economic fundamentals aimed at developing the Iraqi economy," he said.
The federal budget estimated at 108 trillion dinars, with a deficit of 13 trillion dinars, and saw the reduction of the share of the Kurdistan region from 17% to 12.67%.
"The first loser of the postponement of the budget is the Iraqi people, and the postponement of their ratification is a delay for the investment side and a semi-disruption of the operational side," said the head of the Iraqi Economists Association, Abdul Hussein al-Yasiri.
He explained that it is not losses by the delay is the management of the investment side and that the budget is a law on the basis of time limits, every day delay this law is lost investment opportunity on the Iraqi economy.
While more than 4 million people are employed by the private sector, many of whom depend on the budget for their work.
Views 217 Date Added 06/01/2018
Saleh calls on the World Bank to suppor t development projects in Iraq
Thursday, November 29,
Alsumaria News / Baghdad called on the President of the Republic , Barham Salih, Thursday, World Bank for the Middle East and North Africa, to support social and economic development projects in Iraq, stressing the importance of achieving financial, monetary and economic stability in the country.
The President of the Republic, in a statement received by Alsumaria News, a copy of it, said that "President Barham Salih received at the Peace Palace in Baghdad this afternoon, World Bank Vice President for the Middle East and North Africa Farid Belhadj, accompanied by Regional Director of the World Bank for Central Asia Saroj Kumar Jha" .
He pointed out the importance of the World Bank's support for social and economic development projects in Iraq, as well as appropriate reforms, combating corruption, the necessity of developing and diversifying the sources of the national economy and ensuring the requirements of reconstruction.
"The achievement of financial, monetary and economic stability in Iraq is not only a goal but also a basis for political stability and an important strategic project for sustainable development and civil development in the country," Barham Saleh said.
For his part, the World Bank Vice President for the Middle East and North Africa said that "the World Bank is determined to support the Iraqi economy positively and work to support partnership with Iraqi financial institutions by increasing areas of cooperation and the adoption of better investment resources and energies."
Thursday, May 19, 2016, Posted at: 13:08(GMT+7) PM calls for effective use of WB loans Relevant agencies must get well prepared for receiving the remainder of the World Bank's International Development Association (IDA-17) fund allocated for Vietnam in the 2014-2017 period, according to Prime Minister Nguyen Xuan Phuc.
The Prime Minister also urged all bodies to devise measures to ensure the effective use of official development assistance (ODA) and other preferential loans.
The two IDA-funded projects on strengthening the management of land and building a land database, and improving teachers’ effectiveness will remain unchanged in terms of scale, according to hime conclusion.
The Government leader assigned the Ministry of Planning and Investment to be in charge and work with the Ministries of Natural Resources and Environment, and Education and Training, to submit the projects for approval.
Relevant agencies are to complete necessary documents before May 20 to receive WB-funded projects in the fiscal year of 2016 in line with the Government’s Decree No.38/ND-CP dated April 23, 2013 on management and use of ODA and preferential loans.
The PM gave the green light to the State Bank of Vietnam to technically negotiate with the World Bank on IDA projects in the 2016 fiscal year.
He requested the Ministry of Planning and Investment to review the list of projects to be disbursed in the next fiscal year to ensure effective use of the loans.
The Ministry of Finance will cooperate with the Ministry of Planning and Investment in making reports to the Government on the safe limits of ODA and preferential loans, which does not affect the public debt ceiling.
With the Terms of Trade Shocks happening to Iraq, the plan of privatizing the country has become all the rave. Not a new concept and as a matter of fact the plans of privatization has been in the works heavily since 2004. Now I will not waste time building a case but please know that I form my opinion from much of the research out there (if interested I can share the sources), instead I will get straight to the point here.
!The true test of Abadi's intent to privatize Iraq will be whether or not he promotes the Corporatization and Privatization of Iraq's key state-owned banks namely Rafidain & Rasheed!
Regardless of what you read or hear or think, this is what needs to be watched for in the news. The World Bank performed a financial sector review of Iraq and listed "Medium to Long Term Task(s)" for the Ministry of Finance & CBI to pass into law these bullet point items as part of the economic liberalization effort:
■ Clarify the mandate of the specialized state- owned banks, and consider consolidation and conversion into a development banks with increasing their capital, which will not take deposits.
■ Ensure state-owned banks work according to commercial principles and on a level playing field. Early corporatization of state- owned banks should be considered a key element.
■ Over time the authorities should consider gradual privatization of the key state-owned banks.
Why is this important? Because research has proven that as long as the banking structure is managed centrally (i.e. by government) whether fully or partially, a market economy is smothered. It is like finally being given a Lamborghini but a governor is placed on the engine limiting its top-off to 75mph. What is more, control of the banking structure will do just as bad if management is concentrated (a sleight of hand trick governments will attempt to retain control).
Many are wondering what impact this might have on an RV. For those who believe value will be added to the currency once it is unpegged from the dollar, you should understand that moving to a flexible exchange regime has its risks. Those risks are high if the financial sector is not well structured and configured to properly absorb fluctuations and shock in the market. State owned or partially owned banks do not absorb shock well because their political and relationship interest get in the way of forming sound financial policy. For example a consistent problem with state run banks is loaning to bankrupt businesses to help them stay afloat because the owners of the businesses are your friends. Another common issue is with state run banks maintaining managers too inept for the job but appointed because of some personal affiliation. Whereas Privatized banks often change management and scrutinize lending practices to ensure the bank's efficiency at conducting business. Fully privatized banks without government intervention are more profitable.
And so I am not here to argue against an overnight RV versus a gradual rise in value from an overnight exchange regime change. I am opining that Abadi will face the decision of his life - whether or not to fully privatize the key state owned banks.
Remember that these key banks have been groomed for privatization and it is documented in the World Banks playbook for Iraq. For instance when you see articles about E&Y and other 3rd party financial firms coming into Iraq, typically it is not for existing private banks like Bank of Baghdad or North Bank, these banks are not ready to carry the load of an economy like Rafidain & Rasheed. The focus has always been to ensure the readiness of Rifidain & Rasheed Banks to properly privatize and handle the coming market economy because they are Iraq's financial powerhouse and dwarfs all other banking entities. Recall articles like these from yesteryear: "The acting Finance Minister, Ali Yousef Shukri (pictured), is reported to have held a meeting with a representative of the World Bank to discuss the restructuring of the state-owned banks in Iraq. According to the report from NINA, the discussions related particularly to the Rasheed and Rafidain banks." Well this IS the plan and a MAJOR cog in the engine for successful privatization of Iraq's economy.
Can the GOI find within itself to relinquish its control of the money power and liberalize its banking sector?
PS. The concept I am presenting is not new for developing economies. This is where many of them struggle when attempting to make that change from a socialist, government-centric economy to a true market economy. This is the story of Egypt who adopted a very similar reformation plan as Iraq (the similarities are incredible really) from the World Bank but when time came to execute on the banking component, the government would not fully comply with the plan and fully privatize its state owned banks. Egypt floated its currency in 2003, like any market-type economy should, but the long term effects have been troubling.