Dr Ayhan Kose, Director of Prospects Group, World Bank, USA Pics: Salim Matramkot/The Peninsula
Doha: The outbreak of coronavirus, rapid debt accumulation and sharper-than-expected slowdown in emerging economies are posing major risks for 2020 global growth, according to two top economists.
“Just last year, we had elevated concerns that the global economy was heading for recession, not least as a result of the US-China trade war. And even as those concerns have eased somewhat, we now have the shock of the coronavirus outbreak, which is having a range of serious economic impacts,” Adrian Cooper CEO Oxford Economics, UK told The Peninsula.
Speaking on the sidelines of the just-concluded Doha Islamic Finance Conference, Cooper said the world economy is observing the continuing so-called ‘Japanisation’ of economies, with slow growth, sustained below-target inflation, very low or even negative interest rates and high levels of public and private sector debt. This is leading to extended levels of risk-taking by investors in the search for yield, resulting in stretched asset price valuations and deteriorating credit quality. “And while we haven’t yet seen major market corrections in this cycle, there is need for increasingly vigilance the longer the period of very low interest rates lasts,” he said.
Cooper said that the ‘Oxford Economics’ in its study released in January 2020 (prior to the outbreak of Coronavirus) had placed just a 15 percent probability on global financial crisis for 2020. Now, the spread of the epidemic has the potential actually to lead to a much more slowdown in economic growth. “We don’t yet know how exactly it can turn out. But if China can contain the large number of cases effectively and other economies are able to check the smaller numbers, then clearly the global recession could be avoided. But if this becomes a global phenomenon, we could be in a situation where actually, the global economy will see no growth in 2020.”
Addressing the Conference, Dr Ayhan Kose, Director of Prospects Group at World Bank-USA said rapid accumulation of debt, especially in Emerging Markets (EMs) is posing great challenge to global growth. Possibility of financial crisis is higher when debt accumulates at a faster rate. Given the historical averages, Dr Ayhan said, private debt is higher than government debt, which aggravates the situation.
With global economy going through a rough period, there is a need for comprehensive, country-specific policies. World must make sure public health systems are ready for any potential epidemic outbreaks.
There is a need for rebuilding buffers and improve debt management and transparency. Fostering technology and adoption of and innovation is key for a sustained future growth.
On Emerging Markets’ debt growth, Cooper told The Peninsula, there is an important distinction to be drawn between the rise in debt in emerging market economies and the debt level in advanced economy.
“There are number of Emerging Market economies which are following a debt-reliant model of growth. They take a lot of debt and then actually they certainly can’t repeat the same model of growth the next ten years Those debt levels may be a weight on certain emerging market that prevent them in growing in the future as in the past. In contrast, in advanced economies, there are lot of ways to being cautious with regard to debt… In advanced economies there are enough room to borrow, more, invest more and help to stimulate their economies further.”
In terms of debt management, the situation is clearly different in GCC compared to other Emerging Market economies, given the resource this region has. A number of economies in this region who are looking to transform to diversify their economies can actually take more debts in order to achieve that transformation. As long as that is done in a careful way with an clear evaluation of the quality of the projects in which they are investing and the way in which those projects are actually run, so that they are delivering value from money, GCC has enough room for more debt to finance economic growth, Cooper said.
