In this week’s edition, we highlight the following:
- The growing global debt quagmire: The surge in global debt levels over recent years has raised concerns about its potential ramifications for economic stability and growth. The International Monetary Fund (IMF) projects that global government debt will hit US$97.1trn in 2023 – a 40% increase since 2019. High global debt poses a significant problem, given its multifaceted impact on individual nations and the interconnected global economy.
- China’s debt-trap diplomacy and increasing web of influence: As global debt levels continue to surge, one country has found an opportunity where others are still stuck in the quagmire – China. China’s rise as a global economic powerhouse has been accompanied by a controversial “debt-trap diplomacy” strategy, which challenges established international financial institutions and norms.
- The South African Reserve Bank (SARB) maintains a cautious hold on interest rates amid heightened inflation risks: In a welcome improvement for South African consumers, annual consumer price inflation, as measured by the consumer price index (CPI), pulled back in December, easing to 5.1% from 5.5% in November. Looking ahead, inflation is likely to rise in the short term, but we believe that the general trend for this year will be downwards. Any possible interest rate cuts will likely only materialise towards the end of 2024 and depend on the inflation outlook (locally and abroad) and global interest rate developments as we progress further into this year.
The growing global debt quagmire
Over recent years, the surge in global debt levels has raised concerns about its potential ramifications for economic stability and growth. The IMF projects that global government debt will hit US$97.1trn in 2023 – a 40% increase since 2019. High global debt poses a significant problem, given its multifaceted impact on individual nations and the interconnected global economy. One of the primary concerns associated with high global debt is the strain it places on the fiscal resources of nations. Governments must allocate substantial portions of their budgets to service interest payments, limiting the funds available for essential public services, infrastructure development, and social programmes. As such, high debt levels have the potential to stifle economic growth. The “crowding out” phenomenon occurs as governments, burdened with debt, compete with the private sector for available funds. Elevated interest rates can deter private investments, hindering overall economic expansion.
Furthermore, countries with high debt face challenges in responding effectively to economic downturns or unforeseen crises. The capacity for countercyclical fiscal policies, such as stimulus measures, may be restricted, limiting the ability to mitigate the impact of economic shocks. It is also worth noting that elevated debt levels can create vulnerabilities in financial markets. As governments increase borrowing, they may drive up interest rates, impacting businesses and individuals. This poses risks to financial stability and can exacerbate economic uncertainties. This, in turn, creates somewhat of a negative feedback loop – heavily indebted nations further run the risk of credit rating downgrades. A lower credit rating leads to higher borrowing costs, creating a cycle of increased debt burden. This strains the affected country’s fiscal health and has broader implications for the global financial system. Moreover, in an era of global economic interdependence, the impact of high debt is not confined to national borders. Economic crises in one region can quickly spill over to others, creating a domino effect. This interconnectedness necessitates a collective approach to addressing and mitigating the risks associated with high global debt.
With a staggering government debt of US$33.2trn, the US constitutes more than one-third of total global debt. As the debt burden continues to rise, the expense of servicing this debt has reached 20% of US government expenditure. Projections indicate that by 2028, the cost will escalate to US$1trn, surpassing the entire defence budget. Japan, the world’s third-largest economy, grapples with one of the highest debt-to-GDP ratios at 255%, primarily fuelled by an ageing population and escalating social security costs. Over the past two decades, Japan’s national debt has consistently exceeded 100% of its GDP. Throughout 2023, Egypt was confronted with steep borrowing costs, allocating 40% of its revenues towards debt repayments, making it the highest debtor on the continent. Several emerging economies, much like Egypt, are under considerable strain. Lebanon has been in default since 2020, and Ghana experienced a majority default on its external debt — debt owed to foreign lenders — in 2022 amidst a deepening economic crisis.
On a regional basis, North America has both the highest debt and debt to GDP. The US and Canada have experienced significant increases in their debts, with Canada ranking as the tenth highest globally in outstanding government debt. The debt levels across Asia and the Pacific closely resemble North America’s. South America holds US$3.2trn in debt, representing 3.3% of the global total. Certain governments in the region have already initiated interest rate cuts as inflation trends downward. Projections indicate that public debt levels will remain elevated across the region. Africa has witnessed a rapid surge in debt levels, with approximately 40% of public debt denominated in foreign currencies, exposing it to exchange rate fluctuations. Additionally, the region faces the challenge of higher interest rates compared to advanced economies, leading to increased costs for servicing the debt.
The bottom line
By 2028, the IMF projects that global public debt will exceed 100% of GDP, hitting levels only seen during the COVID-19 pandemic. While debt, when managed prudently, can facilitate economic development, its excess can lead to a myriad of challenges. Addressing the issue of high global debt requires coordinated efforts, sound fiscal policies, and a commitment to sustainable economic practices. Failure to do so not only jeopardises the economic well-being of individual nations but also poses risks to the stability of the global economy. It is imperative for policymakers to consider a balanced approach that promotes responsible borrowing and ensures the long-term economic health of nations worldwide.
China’s debt-trap diplomacy and its increasing web of influence
As global debt levels continue to surge, one country has found an opportunity where others are still stuck in the quagmire – China. China’s rise as a global economic powerhouse has been accompanied by a controversial strategy known as “debt-trap diplomacy.” This approach involves extending substantial loans to developing nations, often for infrastructure projects, with the hidden agenda of gaining strategic influence and control. Much of China’s loans are part of the country’s broader investments in global infrastructure – known as the Belt and Road Initiative (BRI). Launched in 2013 and referred to as the New Silk Road, the BRI forms an incredibly ambitious infrastructure project. Its goal is to create a vast network of railways, energy pipelines, highways, and streamlined border crossings. As part of this process, Chinese state-owned creditors rapidly scaled up the provision of foreign currency-denominated loans to resource-rich countries, particularly in Africa. Among the list of the most heavily indebted countries globally, 14 out of the 15 are African nations. Some of these countries are the poorest in the world- consider the likes of Sudan, Niger, Mozambique, Chad, and the Democratic Republic of Congo. The sole non-African country on the list, Bolivia, is also one of the poorest nations in South America. According to the US-China Economic and Security Review Commission, 60% of China’s debtor nations were in financial distress in 2022, up from 5% in 2010.
This assertive economic diplomacy, i.e., ‘debt-trap diplomacy’, has raised concerns globally for several reasons. As mentioned earlier, as part of debt-trap diplomacy, China often extends loans to developing nations for large-scale infrastructure projects. If debtor countries struggle to repay these loans, they may be vulnerable to Chinese influence. In some cases, this has led to China gaining control or ownership of strategic assets, which raises concerns about the affected countries’ sovereignty. By creating economic dependencies through debt, China can exert significant influence over debtor nations. This economic leverage allows China to shape the economic policies and decisions of the borrowing countries, potentially compromising their autonomy and economic stability. Furthermore, the terms of the loans provided by China under the BRI sometimes include high interest rates and short repayment periods. This can lead to unsustainable debt burdens for borrowing nations, making it difficult for them to meet their financial obligations and risking economic instability. High debt levels in multiple countries, particularly if unsustainable, pose risks to global financial stability. A widespread failure of debtor nations to meet their financial obligations could have ripple effects on the global economy and financial markets.
Conversely, while China’s debt-trap diplomacy has been criticised for its potentially negative consequences, proponents argue that it also conveys certain benefits. One of the primary objectives of China’s debt-trap diplomacy is to finance large-scale infrastructure projects in developing nations. These projects, such as roads, ports, and energy facilities, can contribute to economic development, job creation, and improved connectivity. As such, capital infusion into developing countries through loans can stimulate economic growth. Improved infrastructure can enhance productivity, facilitate trade, and attract foreign investment, increasing economic activity. For countries that may have difficulty accessing financing through traditional channels like international financial institutions, China’s loans can provide an alternative source of capital. This can be particularly beneficial for nations with limited creditworthiness in global financial markets. It is worth noting that China’s approach challenges the traditional development model promoted by Western institutions, offering countries an alternative path to economic progress. Some nations may see this as an attractive option, especially if they feel marginalised by existing international institutions.
The bottom line
Overall, China’s approach to debt-trap diplomacy challenges established international financial institutions and norms. It provides an alternative model of economic development that may undermine the influence of institutions like the World Bank and the IMF. China’s debt-trap diplomacy is seen as a means to expand its global influence and challenge the existing international order. The acquisition of strategic assets and influence over key regions can contribute to a shift in the balance of power, impacting geopolitics and global governance structures. It is important to note that while there may be perceived benefits, the overall impact of China’s debt-trap diplomacy depends on the implementation, transparency, and long-term sustainability of the projects. If not managed carefully, the benefits may be overshadowed by the risks and challenges associated with high debt levels and the potential loss of sovereignty.
The SARB maintains a cautious hold on interest rates amid heightened inflation risks
In a welcome improvement for South African consumers, annual consumer price inflation, as measured by CPI, pulled back in December, easing to 5.1% from 5.5% in November. Importantly, core inflation (excluding the more volatile price categories of food, fuel and electricity prices) remained steady at 4.5% YoY in December despite rising prices for housing and utilities, health and restaurants and hotels. As such, core inflation remains relatively subdued, particularly on the demand side. The average core inflation for 2023 was 4.8%, compared with 4.3% in 2022. Notably, food and non-alcoholic beverages prices decelerated for the first time in four months, printing at 8.5% YoY from 9.0% YoY in November. The decline was supported by ongoing moderation in bread and cereals prices and favourable declines in vegetable prices.
Nonetheless, other categories recorded price increases – such as meat prices, which continue to be hampered by poultry prices. The downward trend in fuel prices continued in December, decreasing by 2.5% YoY compared with a 1.8% YoY decline in November. This was mainly due to lower oil prices, which more than offset the slight depreciation of the rand. The 2023 inflation results are wrapped up with the December release. The yearly average inflation rate stood at 6.0%, a decrease from 2022’s 6.9%. In the initial five months of 2023 (January to May), inflation remained relatively high, consistently surpassing 6.0%. However, inflation eased below this threshold for the remaining seven months of the year. The peak inflation rate for 2023 occurred in March at 7.1%, while the lowest was recorded in July at 4.7%. Product categories that concluded the year with annual rates higher than 6.0% in December included food & non-alcoholic beverages (8.5%), restaurants & hotels (7.0%), and health (6.5%).
Against this backdrop, as expected, the SARB cautiously kept the repo rate on hold at 8.25% at its first Monetary Policy Committee (MPC) meeting for the year, with the prime rate remaining at 11.75%. Given that the market all but priced in the decision to hold, the key to the 25 January statement was the overall tone, which was closely watched by market participants across the board to better understand the conditions under which the SARB may consider easing monetary policy. Although headline inflation is on an easing trajectory, the SARB remains understandably cautious. According to the Bureau for Economic Research (BER), survey-based inflation expectations deteriorated closer to the top end of the target range in 4Q23. Average expectations for 2024 and 2025 rose 0.2 ppts and 0.3 ppts to 5.7% and 5.6%, respectively. Meanwhile, the exchange rate has drifted weaker since the last MPC meeting. The MPC remains concerned about possible upside price shocks from supply chain disruptions in the Red Sea and the current heightened geo-political tensions.
The bottom line
Looking ahead, inflation is likely to rise in the short term, but we believe that the general trend for this year will be downwards. For January, rising inflation will be primarily due to fuel price base effects. There may be a further uptick in the inflation print for February as the Central Energy Fund (CEF) data on 23 January pointed to a higher-than-expected fuel price adjustment at the beginning of February because of higher oil prices and a weaker rand vs US dollar exchange rate. Nonetheless, we continue to view food prices as a key upside risk given the various ongoing supply shocks, particularly ahead of the forecast El Niño weather pattern and amid relatively large swings in crucial commodity prices (including oil) and the rand exchange rate. Overall, we maintain that interest rates have peaked and will remain at current levels for some time. The forward-looking real interest rate is already high enough for the prevailing economic backdrop, with inflation forecasts remaining inside the target range and demand-driven and wage inflation remaining modest. Any possible interest rate cuts will likely only materialise towards the end of 2024 and depend on the inflation outlook (locally and abroad) and global interest rate developments as we progress further into this year. Overall, risks to the inflation outlook have deteriorated – geopolitical tensions have worsened, and the deteriorating performance at our key ports adds uncertainty to the future inflation path. Due to these various risk factors, we believe the MPC will not rush to cut the repo rate.
