The global economy has experienced huge injections of liquidity coupled with unprecedented fiscal responses. A complete financial meltdown has been averted and co-ordinated global action has achieved its purpose.
However, due to the huge increases in associated debt due to emergency monetary and fiscal packages, state growth strategies will be deferred as global governments are hobbled by astronomical debt levels.
Abnormally high debt-to-GDP levels were last seen during World War 2, but in the postwar period the global economy enjoyed tailwinds such as the Marshall Plan, computerisation and globalisation. These helped to reduce this debt and achieve growth simultaneously.
SA’s only economic salvation, including reducing its hugely onerous debt burden, lies in a speedy implementation of economic reforms
However, none of these boosters are around this time to rescue economies, as many market commentators and financial pundits are constantly reminding us. Our huge debt now exists in a disinflationary environment.
We therefore cannot inflate our way out of indebtedness, as would be the case in a higher inflation environment in which the value of debt is progressively eroded. Productivity gains are also more difficult to achieve now than in the 1950s, education levels have peaked, as has globalisation. Extremely high debt levels are thus likely to be around for many years.
Most governments have responded quickly and decisively to counteract the effect of the virus and have generally not cared too much about the consequences of the ensuing debt burdens. As interest rates are at historically low levels, the effect of significantly higher debt ratios may not be felt for some time, at least for as long as interest rates remain at these depressed levels.
Government debt to GDP is a good proxy for indebtedness in any country. In SA just before the pandemic, this figure was about 60%, excluding debt associated with state-owned enterprises such as Eskom.
This level was viewed as being high, notwithstanding the fact that many other countries have significantly higher debt ratios than that. SA’s ratio is now probably about 90%, given that it has recently taken on huge amounts of new debt to cope with the virus.
The precise value will only be known once the latest SA Reserve Bank Bulletin is released or when finance minister Tito Mboweni presents his emergency budget on June 24. A level anywhere near 90% will be virtually impossible to service unless special terms are negotiated, presumably with international agencies such as the IMF or World Bank.
Due to the huge spike in state borrowings, yields on SA government bonds have increased sharply since the pandemic started and are now especially attractive to investors who see low to no returns in developed-market bonds. SA’s only economic salvation, including reducing its hugely onerous debt burden, lies in a speedy implementation of economic reforms that has been promised by the government but signs of which are conspicuous by its absence. We all wait with bated breath for Mboweni’s budget on June 24.
As government debt soars, many countries could be heading the same way as Japan, in a postcoronavirus landscape, with ageing populations, deflation and rocketing public debt. Some countries in the developed world, notably Europe and the UK, are following an eerily similar pattern. Japan’s debt to GDP stands at 230%. Because the central bank, being the Bank of Japan, owns more than half of this debt, the country is less vulnerable to foreign capital outflows.
It has been using quantitative easing since 1997 to keep interest rates low, while the country still manages to forge ahead with large public spending programmes. The result is an economy with no inflation, a strong currency, low interest rates and low growth. It stumbles along and works after a fashion. This route is not an option for SA, and I fear the unsustainable debt levels will consume it.
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