August 26, 2022: Global News Roundup
Bailouts and debt deals signal dismal global economic outlook
The Global News Roundup collects news stories from entirely international (non-US) media sources on variety of pressing global political and economic issues and events.
The global economy is poised to fall off a cliff in the second half of 2022, with bailouts and debt deals coming in hot and heavy this week. Following Sri Lanka’s early lead, across the developing world, governments are turning to the International Monetary Fund (IMF) for help, including:
· Bangladesh: “The IMF’s readiness to help Bangladesh with a bailout package over the next three years is a clear acknowledgement of the country’s economic crisis. Bangladesh has also knocked on the door of the World Bank for a billion-dollar loan, and USD 2.5–3 billion have been sought from other multilateral institutions and donor nations like Japan”, reported the New Indian Express.
· Pakistan: The IMF has already approved a bailout package, including a forthcoming disbursement of more than US$1.1 billion. “The move follows the completion of the $4 billion in bilateral financing from four friendly nations and would pave the way for immediate disbursement, expected to be in Pakistan's account before the end of working hours on August 31”, reported the Khaleej Times.
· Egypt: Prime Minister Mostafa Madbouly met with IMF officials last week about new loans. “[T]he main priorities of the government in the current period are to guarantee the stability of the economy and reduce the negative impact of the global economic crisis. Last March, Cairo requested the IMF’s assistance through a new loan programme in order to help the government face the severe repercussions of the Russian-Ukrainian conflict on the economy”, reported Ahram Online.
· Argentina: Officials are making big fiscal changes to comply with the terms of the country’s recent US$44 billion deal with the IMF, including cutting electricity subsidies to some current recipients. “The plan is to impose the steepest increases on high earners and shield low-income users from the same treatment across gas, electric and water bills. The government is also asking citizens to ration their energy use at home”, reported the Buenos Aires Times.
· Chile: Officials are discussing a US$24 billion disbursement from the IMF’s Flexible Credit Line. “The Chilean authorities intend to treat the credit line as precautionary”, reported MercoPress.
These five countries together are home to almost 600 million people, close to 10% of the world’s population, and contributed about 3.6% of world GDP in 2021 (PPP, inflation adjusted).
While developing economies have so far shouldered most of the burden of the unfolding global economic crisis (and will continue to do so because risk always hits the poor hardest), developed nations are also showing serious signs of distress. And it’s not just errant multinationals dealing with margin calls, or strange market disconnects in futures pricing (more info here from my prior post on these issues in July). Food, water, and energy shortages, as well as hyperinflation and debt crises, are upending markets and creating conditions conducive to civil unrest:
· The United Kingdom (2.2% of real global GDP, in PPP terms, in 2021): The Express reported that one in five Britons are financing energy bills on credit. Scottish MP Alex Crowley recently warned of “poverty on a scale not seen in modern times, and civil unrest across the country if the UK government does not act”. Officials proposed “covid-style” bailouts this week for some 400,000 businesses struggling with crushing energy bills. “Hospitality operators have claimed they are facing annual bill increases "in the region of at least 300%", reported the Birmingham Mail.
· Germany (3.4% of real global GDP, in PPP terms, in 2021): The Rhine’s water levels have fallen so low that fully loaded barges cannot not pass, multiplying the negative effects of the recent heatwave on economic and social stability: “Flowing from the Swiss Alps to the North Sea via German industrial heartlands, the Rhine is a major route for products ranging from grains to chemicals and coal… Economists estimate the disruption to Rhine shipping could knock as much as half a percentage point off overall economic growth this year in Europe's largest economy.” The government has decreed that essential goods will receive priority on national rail lines should shipping disruptions on the Rhine continue. In the energy sector, major utilities are receiving bailouts from the German government, as the Ukraine war chokes off natural gas supplies. “Describing itself as a “pawn” in the crisis triggered by Russia’s invasion of Ukraine, Germany’s largest importer of Russian gas [Uniper] last month received a 15 billion euro government bailout so it could afford to buy elsewhere”, reported EuroNews last week. Beginning October 1, the government will allow utility companies to pass on 90% of rising energy costs to consumers, “in a move to save its importers from faltering”.
· China (roughly 18% of real global GDP, in PPP terms, in 2021): With a mortgage payment boycott rattling housing and mortgage markets, the Chinese government in July moved to bail out major housing developers: “Beijing is seeking to mobilise up to 1 trillion yuan ($212 billion) of loans for stalled property developments, in its most ambitious attempt to revive the debt-stricken sector and mollify home buyers who are boycotting mortgage repayments after lengthy construction delays.” This week, the Independent (out of Ireland) reported that the program is “the biggest financial commitment yet from Beijing”, a clear sign of growing government concern about the sector.
With a lot on the line politically and economically, the US and China, two of the developing world’s largest creditors, are jostling for position in emerging debt markets. Flipping an old script (one used countless times in past decades to criticize various US loan programs), the US has accused China of creating “debt traps” for developing economies. And, also like the US, China has vehemently denied these claims, going so far as to announce on Wednesday plans to cancel interest-free loans held by 17 of the world’s poorest economies. The countries receiving relief are part of a larger group of Debt Service Suspension Initiative (DSSI) countries designated by the G20 as having high debt risks. The chart below from the IMF shows rising levels of debt distress among low-income, DSSI countries, and can be viewed in the original here. Note that more countries are experiencing debt distress this year, and many more in the high risk category too, relative to even the Great Recession in 2009.
The IMF notes that “China is now the largest official bilateral creditor in more than half of DSSI countries, including when counting all 22 Paris Club creditors as a single pool.” The Paris Club counts the US, UK, Canada, Australia, Germany, France, Japan, Korea, Brazil, Russia, and Norway, among others, in its list of permanent members and has long been (arguably) the single most important creditor group negotiating debt workouts with developing country governments. That the Paris Club as a whole is being outpaced by China in so many national debt contexts is significant. The chart below shows the composition of DSSI country debts by creditor or creditor group, and can be viewed in the original here.
Things I’m keeping an eye on:
1. The G20 meetings upcoming in November in Bali. Putin and Xi have announced that they plan to attend. Biden wants other G20 countries to exclude the Russian delegation. So far, there seems little interest in doing so. Indonesia, which is hosting the event, appears to be supportive of Putin’s attendance.
2. Fall harvests. From France and China to Texas, California, and Vietnam, fall harvests are not looking good, with heatwaves, droughts, frosts, floods, and high energy and fertilizer prices taking a serious toll. Wheat, cotton, rice, coffee, and tomatoes, among many other crops, are under threat. When food prices hit crisis levels in 2011, almost 45 million people fell into “extreme” poverty (at that time, this meant living on less than US$1.25/day).
3. The death of Darya Dugina, daughter of Putin ally Aleksandr Dugin, in Russia last week. Russia alleges that she was assassinated by a Ukrainian national, though the identity of the perpetrator, their loyalties, and reasons for killing her remain unclear.