Global debt growing alarmingly, ADB keeps Asia’s growth outlook at 5.9% but warns …

 Global debt growing alarmingly, ADB keeps Asia’s growth outlook at 5.9% but warns …

KUALA LUMPUR (September 2017): According to the Institute of International Finance (IIF), the world debt jumped by US$500 billion to US$217 trillion in the first quarter of this year!

That’s a humongous amount of debts, making up 327% of the world Gross Domestic Product (GDP).

And the world debt is some RM50 trillion more than it was a decade back.

I Love Malaysia-China Silk Road also notes that while the Asian Development Bank (ADB) is buoyed by a pick-up in world trade and China’s expansion, it flags the risk of the US tightening its monetary policy.

Investors and corporates who follow the developments in China’s multi-billion-ringgit One Belt One Road (OBOR) initiative are urged to digest the following two reports reproduced below.

The reports could possibly help you make sharper judgments and decisions on opportunities and economic matters.

Read on for the details:


Risk of a New Debt Crisis Looms

Sep 25 , 2017

Zhang Monan
Researcher, China Int'l Economic Exchanges Center

The Institute of International Finance (IIF) reported that, within the first quarter of 2017, world debt jumped by $500 billion to 217 trillion dollars, reaching 327% of world GDP. World debt is now 50 trillion dollars more than it was ten years ago. Debt soared not only in developed countries, but also in emerging economies. Although the international financial crisis broke out ten years ago, evidence suggests that a new debt crisis is mounting.

According to the IMF, the public debt level in the US, Japan, and certain European countries has already reached dangerous levels. The scale of all sorts of debt in the US, including federal government debt, corporate debt, household debt, and private debt is nearing an all-time high. The IIF report pointed out that the overall profit of US enterprises has fallen since 2014 but US enterprises still crazily issue bonds. The ratio of net debts to profits is 1:1.4, twice as high as it was during the 2007 subprime bubble period. However, most of the funds raised through issuing bonds were used to pay dividends, buy back shares and back up mergers instead of being used for capital investment.

Similarly, the debt level of emerging economies has also surged. On the one hand, since 2008, aggregate world demand has dropped, obviously reducing the demand for exports from developing countries. Consequently, the trade surpluses of the export-oriented emerging market economies greatly declined, narrowing the external liquidity gained by these economies from trade.

On the other hand, the US interest rate hikes intensified the foreign debt burden of emerging markets, resulting in the sharp increase of short-term debt payment risk. On the basis of the data collected by Bloomberg since 1999, US dollar-denominated enterprise bills issued by emerging markets have climbed to $160 billion this year, more than doubling from the amount issued over the same period last year, representing the highest bond issue rate in history. IIF statistics also show that emerging markets will face the maturity date of more than $1.9 trillion in dollar bonds by the end of this year; the US dollar-denominated debt accounts for 1/5 of total debt.

The risk of a new debt crisis will not only come from the rapid increase of global debt, but from the US Fed’s interest rate hikes, default risk, and uncertainty at economic growth prospects, which will further weaken the global debt market. Since the 2008 financial crisis, governments have rushed to ease their monetary policy by implementing ultra low and even negative interest rates. This did not bring about substantial economic growth, but instead reduced potential economic growth, resulting in a substantial rise in debt. The high levels of debt have constrained investments and further weakened labor productivity growth. This weak growth has made the debt burden unsustainable, resulting in a vicious cycle.

In terms of fiscal stimulus, over the past two years fiscal expansion in developed countries slowed somewhat. However, the large-scale tax cuts and trillion dollar infrastructure investment promised by the Trump administration increases the risk of soaring US federal government debt and fiscal deficits.

Furthermore, Trump has recently hinted that he hopes to cancel the restraint of a debt ceiling in the next fiscal debt ceiling negotiation in December so the US government can borrow without limit. If this becomes a reality, US fiscal policy will lose an important check and the US government will recklessly issue money and wind up deep in debt.

Due to the reduced supply of dollar assets, the global restructuring of investment and savings, and the current account rebalance between surplus countries and deficit countries, global real interest rates and debt yields have begun to rebound from record low levels. Thus it will certainly increase borrowing costs and debt defaults, impeding sustainable global economic growth.

Compared with the European debt crisis, the scale of this round of debts is larger and accumulates faster. Not only does the total amount of debt keep growing, the pressure of short-term debt payment continues to increase. Therefore policymakers in all countries should make the stabilization of debt growth a priority. They should reduce the use of unusual monetary policies to stimulate the economy, speed up economic and financial reforms, and adjust the balance sheets of banks, enterprises, and the government. It is time to comprehensively lower the debt level, enhance total factor productivity and rate of return, and deal with the cumulative effect of existing debts so as to lay a foundation for sustainable global economic growth. – China US Focus

Global debt has more than doubled in the last 15 years; and according to the International Monetary Fund (IMF), it’s the highest it’s ever been. Is it any surprise that in the last 40 years we have had some 150 systemic banking crises and 70 sovereign debt crises? Indeed, the Bank of England recently suggested that private debt is one of the biggest threats to the UK economy. And yet the Bank has just introduced policies (lower interest rates and an expanded QE programme) designed to encourage even more borrowing and debt. In fact, these policies are designed to reinforce the same lending that led to the financial crisis. We clearly need better ways of stimulating growth, boosting people’s incomes, and financing the necessary infrastructure investment for a green economic transition. We need an economic strategy that does not rely on increasing private or the net level of public debt.
Global debt

In a new report, the IMF warned that public and private debt – excluding the financial sector’s – at the end of last year hit $152 trillion. With two-thirds of this owed by the private sector, the rest of it is public debt. But debt in of itself is not necessarily a bad thing. In Western economies, the primary problem is that the bulk of this debt is not being used for productive purposes (i.e. to boost private sector incomes, finance infrastructure and a green economic transition). Indeed, in the UK over 80% of bank lending goes into sectors that don’t directly contribute to an increase in productivity. ADB keeps Asia 2017 growth outlook at 5.9%, flags risks from Fed unwinding - PositiveMoney (WRITTEN BY FRANK VAN LERVEN ON OCTOBER 18, 2016)
Tuesday, 26 Sep 2017
3:31 PM MYT

MANILA: Developing Asia is on track to grow faster this year and next, the Asian Development Bank said on Tuesday, buoyed by a pick-up in world trade and China’s expansion, but it flagged risks from tightening US monetary policy.

Developing Asia is expected to grow by 5.9% and 5.8% in 2017 and 2018, respectively, the Manila-based lender said.

That is unchanged from its July estimates, but higher than the 5.7% forecast it gave for both years in its Asian Development Outlook (ADO) released in April.

China is expected to grow 6.7% this year and 6.4% next year, the ADB said, unchanged from its July estimates.

“Growth prospects for developing Asia are looking up, bolstered by a revival in world trade and strong momentum in PRC (China),” ADB chief economist Yasuyuki Sawada in a statement after the bank updated its 2017 outlook.

Sawada said developing Asia should take advantage of favourable short-term economic prospects to invest in infrastructure, improve productivity and maintain sound economic policies to lift long-term growth.

However, the ADB trimmed its growth forecast for South Asia to 6.7% this year and 7.0% next year, compared with estimates of 7.0% and 7.2% made in July.

India’s growth was seen at 7.0% and 7.4% for this year and next, weaker than the July forecasts of 7.4% and 7.6%.

South-East Asia's economy will grow 5.0% this year and 5.1% next year, stronger than July forecasts of 4.8% and 5.0%.

Still, the ADB said regional policymakers need to brace for potential capital outflows and higher borrowing costs as the Federal Reserve begins the unwinding of a decade of aggressive monetary stimulus and continues to raise interest rates.

“Because long-term interest rates in many Asian economies are closely linked to those in the US, policymakers need to strengthen their financial positions further and monitor debt levels and asset prices,” the ADB said.

The ADB said Indonesia, Malaysia, Thailand and Taiwan could benefit from a boost in accommodative policy, but intensifying inflationary pressures make the case for stimulus in the Philippines and South Korea less clear.

Inflation in the region was forecast to be slightly slower at 2.4% this year and 2.9% next year, compared with the 2.6% and 3.0% estimated in July. - Reuters