SA’s Group of 20 (G20) presidency will bring a stronger focus to tackling the structural issues that hinder investor appetite for emerging markets and developing economies at a time mobilising private investment for these economies has never been more critical or more challenging, says a Washington-based forum of the world’s leading commercial banks.
The report, from the Institute of International Finance, cites “US exceptionalism”, geopolitical tensions and record debt levels as factors that will make it tough for poorer countries to attract the investment they need.
It points to ingrained perceptions that these countries are high risk. However, it also mentions ways to mitigate these, urging the countries to improve their risk profiles and lending support to one of the G20 priorities — boosting the capacity of multilateral lenders such as the World Bank, to derisk and support more private financing for emerging and developing economies.
The institute’s report last week came as the World Bank warned that developing economies, which fuel 60% of global growth, would finish the first quarter of the 21st century with the weakest long-term growth outlook since 2000.
“Even as the global economy stabilises in the next two years, developing economies are expected to make slower progress in catching up with the income levels of advanced economies,” the World Bank said in its latest Global Economic Prospects report.
However, the World Bank is upbeat on SA, where it now projects growth will rise to average 1.9% a year in 2025/26. This is half a percentage point higher than it projected in July, and is more optimistic than the view from the IMF, whose latest forecasts on Friday put SA’s economic growth at 1.5% in 2025 and 1.6% in 2026.
The fund’s forecasts, in an update to its world economic outlook on Friday, are unchanged compared to October’s outlook for this year, and up just 0.1 of a percentage point for next year.
Deniz Igan of the fund’s research department said electricity reforms were expected to be ongoing and there would be an uptick in activity going forward. Inflation was expected to be lower than expected in October, reflecting the affect of the Reserve Bank’s actions, moderated inflation expectations and the decline in global oil prices.
The fund’s forecasts for the global economy are also almost unchanged, at 3.3% this year and next, which is below the average of the past two decades. But it now sees the US’s prospects, particularly for 2025, as even better than it expected three months ago, while it sees those of the euro area as being worse, and warns that countries other than the US face downside risks amid “elevated uncertainty”.
The World Bank’s global growth forecast is even more muted than that of the fund, at 2.7% growth for both of the next two years. While it expects growth in developing economies to be steady at 4% this “would be a weaker than before the pandemic — and insufficient to foster progress necessary to alleviate poverty and achieve wider development goals”, its report said.
But on SA the World Bank said improved energy supply and further reforms in the transport sector would support stronger growth, along with a rebound in household consumption on lower inflation and interest rates. Private investment could gain momentum amid rising business confidence.
Where the fund’s recent report on SA was sceptical that the government could stabilise the public debt as it promises, the bank expects fiscal policy to remain prudent, with the aim of stabilising public debt by 2026, though it cautions that this depends on containing spending pressures from the government’s wage bill, state-owned enterprises and “unfunded healthcare reforms”.
More than half of sub-Saharan African countries were at high risk of debt distress at end-September, the World Bank found, and many were struggling to cope with high debt service costs, particularly those facing reduced donor support and depreciated currencies. Higher-for-longer global interest rates could heighten the risk of government debt distress for many economies in the region given limited access to external finance at favourable interest rates, it said in its report.
SA has put addressing Africa’s debt crisis high on its list of objectives for the G20 presidency this year.
Last month finance minister Enoch Godongwana appointed former finance minister Trevor Manuel to head a review of the cost of capital for Africa and developing countries in general, promising a holistic approach to this that would include pressing ahead with multilateral development bank reform and promoting measures to mobilise private finance as well as accelerating the development of local currency bond markets that could help to reduce countries’ dependence on foreign debt.
The Institute of International Finance’s Emre Tiftik and Sonja Gibbs said mobilising private capital into emerging market and developing economies would be a critical challenge in 2025 and beyond. It urged emerging market and developing economies to improve their own risk profiles and enable more accurate assessment of their profiles by, for example, strengthening their investor relations programmes and providing more and better information to investors. It called for multilateral development banks and development finance institutions to be bolstered.
“US exceptionalism is increasingly drawing private investment away from the rest of the world — not least from emerging markets,” they said in an Institute of International Finance report that asked whether emerging market risk was being overestimated.
“Geopolitical tensions, supply chain disruptions, climate change, persistent debt-related vulnerabilities and the rapid evolution of artificial intelligence are likely to further cross-border investment into emerging market and developing economies, including both equity and debt-generating flows. This comes at a time when such investments are urgently needed to facilitate the energy transition and achieve broader developmental goals.”
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