A bold targeted fiscal expansion, led by the advanced economies, is the only way to build a fair and resilient economic recovery from Covid-19, according to UNCTAD’s Trade and Development Report 2020.
Public-debt-to-GDP ratios will increase substantially in 2020 and, if the past is any guide, they will not return to pre-Covid-19 values quickly. What matters, according to the report, is how that return happens.
“A proper fiscal consolidation requires, first and foremost, a strong economic recovery; and governments must take the lead,” UNCTAD Secretary-General Mukhisa Kituyi said.
This principle did not guide responses after the global financial crisis (GFC), when false parallels between government and household budgets led many economies to opt for austerity.
The idea of expansionary austerity was, the report shows, a failure, leaving a fragile fiscal situation on the eve of the Covid-19 shock.
Developing countries need significant support
But given the constraints on spending in many developing countries, significant international support will be needed to ensure they have the required fiscal space.
The Covid-19 pandemic has upended public balance sheets when the global economy was already careering into a wall of debt. According to the Institute of International Finance, in the first quarter of 2020 global debt stocks reached record levels of $258 trillion.
In response to the Covid-19 crisis, the global debt-to-GDP ratio jumped by no less than 10 percentage points to 331% of GDP in the first few months of the pandemic alone.
In developed economies, fast rising non-financial corporate debt of deteriorating quality was the problem. The total indebtedness of non-financial corporates had risen to $75 trillion at the end of 2019, twice its level in 2008.
According to the report, of the global stock of outstanding non-financial corporate bonds – reaching record levels of $13.5 trillion at the end of 2019 – only 30% were rated A or higher.
Corporate defaults therefore reached new heights in the first half of 2020, in particular in the US and the euro area, reflecting both falling earnings due to the Covid-19 shock and their long-term addiction to debt-financing.
Governments’ balance sheets under pressure
With governments extending loans and guarantees in the lockdown, this wave of corporate defaults is likely to put additional pressure on their balance sheets, the report says.
In developing economies, while corporate bond markets have also grown substantively since the GFC in some larger emerging markets – to $3.2 trillion by 2017 – overall debt dynamics are dominated by the exposure of sovereigns to the spillover effects of global financial instability.
This is happening in a context of widespread capital account liberalization and a stronger reliance on external borrowing from private rather than bilateral and multilateral creditors.
Volatile investor sentiment, commodity price fluctuations, shortening maturities and greater rollover risks, higher external debt service burdens (as a percentage of export earnings and government revenues), as well as a weakened ability to self-insure against exogenous shocks through reserve accumulation pose a panoply of risks.
It therefore should come as little surprise that developing countries have been more limited in mobilizing domestic fiscal resources to respond to the Covid-19 pandemic than developed economies– reflecting a dangerous global divide been the haves and the have-nots.
Current debt relief inadequate
At present, the initiative by the G20 and the Paris Club to suspend bilateral debt service repayments for a select number of vulnerable developing countries from May to December 2020 is the main deal on the table.
But the numbers don’t match the scale of the problem: The initiative has been taken up by just over half of eligible countries so far, promising to deliver around $14 billion of temporary debt repayment relief for 2020.
This compares to developing countries facing substantial redemption schedules for their public external debt in 2020-21, amounting to between $2 trillion and $2.3 trillion for high-income developing countries and to between $600 billion and $1 trillion for middle- and low-income developing countries, according to UNCTAD calculations.
In the meantime, billionaire stockholders that own the vast bulk of corporate stocks profiting from the Covid-19 shock rather than faltering under it, have seen their personal wealth grow by over $500 billion in the US alone in the first months of the pandemic.
Copyright 2020 Al Hilal Publishing and Marketing Group