In a crisis, it pays to be wealthy. The response of the developed world to the devastation of their economies by coronavirus has been to throw money at the problem. The IMF estimates that the combined fiscal and monetary stimulus delivered by advanced economies has been equal to 20 per cent of their gross domestic product.
Middle income countries in the developing world have been able to do less but they still put together a combined response equal to 6 or 7 per cent of GDP, according to the IMF.
For the poorest countries, however, the reaction has been much more modest. Together they injected spending equal to just 2 per cent of their much smaller national output in reaction to the pandemic. That has left their economies much more vulnerable to a prolonged slump, potentially pushing millions of people into poverty.
Right from the start of the crisis, the IMF and other international institutions have warned in stark terms about the threat that the pandemic presented to the world’s poorest countries.
In April, Kristalina Georgieva, the IMF managing director, said the external financing needs of emerging market and developing countries would be in “the trillions of dollars”.
But the response from the international community so far has been more muted. The IMF itself has lent $100bn in emergency loans. The World Bank has set aside $160bn to lend over 15 months — while estimating that low and middle-income countries will need between $175bn and $700bn a year.
The only co-ordinated innovation has been a debt service suspension initiative unveiled in April by the G20 group of the world’s largest economies. The DSSI allowed 73 of the world’s poorest countries to postpone repayments.
“In this crisis, there has been no co-ordinated, messaged response,” says Douglas Rediker, a senior fellow at the Brookings Institution and former US executive director on the board of the IMF. “The international architecture that was created in a different era is struggling to adapt.”
The situation is getting more urgent as the pain from the pandemic crisis starts to be felt. Zambia this week became the sixth developing country to default or restructure debts in 2020 and more are expected as the economic cost of the virus mounts — even amid the good news about potential vaccines.
Some observers think that even large developing countries such as Brazil and South Africa, which are both in the G20 group of large nations, could face severe challenges in obtaining finance in the coming 12 to 24 months.
But there is also potential that the international institutions will begin to step up their response to the developing world. The first opportunity is a meeting this weekend of the G20, where leaders will be buoyed by the prospect of vaccines bringing their own crises to an end.
They are expected to approve a “common framework” on debt treatment for poor countries, moving beyond immediate cash flow problems to address longer-term debt sustainability.
Mohammed al-Jadaan, finance minister of Saudi Arabia, which holds the G20 presidency this year, says the framework offers a “tool for structural reform” to help heavily indebted low-income countries break the cycle of unsustainable borrowing, as relief will be linked to IMF programmes.
The other factor is US President-elect Joe Biden’s incoming administration, which many observers believe will be more supportive of multilateralism than was the case under President Donald Trump.
One result could be a revival of a proposal for the IMF to issue special drawing rights — an international reserve asset. SDRs can be used to deliver cash injections that some officials and economists believe is the silver bullet that could limit the economic pain in the developing world.
“The SDRs idea will come back to life under Biden,” says Tim Adams, chief executive of the Institute of International Finance. “There will be a fresh set of eyes and a willingness to look at anything and everything that might work.”
Little sign of trickle-down
If so, it would mark a break with the recent past. In contrast with the co-ordinated action among the G20 during the global financial crisis a decade ago, much of the rich world has spent this crisis looking after its own.
Some of their spending has trickled down to poor countries. The US Federal Reserve and other advanced economy central banks have pumped trillions of dollars into financial markets, buoying up demand for risky assets. As a consequence, middle-income and some low-income countries were able to borrow $145bn by issuing dollar-denominated sovereign bonds between January and September, according to the IIF.
Ms Georgieva said such actions had “an incredibly high significance” in reducing uncertainty. “While there has been criticism that there hasn’t been the same level of pronouncements by heads of state as there was during the global financial crisis, the mechanism of co-operation of finance ministry and central bank authorities has proven to be durable and is paying back,” she said.
Nevertheless, many developing countries remain shut out of bond markets by high interest rates. No country in sub-Saharan Africa, for example, has issued international bonds since the crisis began.
Other countries have used the available short-term liquidity to finance an immediate response, storing up potentially severe problems ahead. Brazil launched a generous income-transfer programme which it has had to rein in because of budget constraints, and borrowed heavily to fund it by issuing short-term domestic bonds that offer cheap finance but must be repaid quickly.
“Brazil and South Africa face the kind of problem that other emerging markets will slowly encounter — a big fiscal problem killing growth,” says Bhanu Baweja, chief strategist at investment bank UBS.
The G20’s flagship response to the crisis, the DSSI, only addresses a part of the problem. The initiative allowed 73 of the world’s poorest countries to postpone repayments due until December this year on official bilateral loans from G20 governments and their policy banks — though the debts must still be met in full, with repayments spread over four years. Last month, the DSSI was extended to June 2021, with repayments spread over six years.
Forty-six debtor countries took up the offer this year, deferring about $5bn in repayments. That is a quarter of the amount projected by the G20 when the initiative was announced in April and less than a tenth of the increase in the external borrowing needs of the eligible countries this year as a consequence of the pandemic, according to the IMF.
Last week, the G20 agreed to go further. Its proposed common framework, to be approved at this weekend’s summit, is an advance on the DSSI, which can offer short-term relief up to the amount of debt falling due during the period but does not take into account a country’s ability to pay.
The common framework aims to address this by assessing whether a country’s debts are sustainable, by signing it up to an IMF programme, and by involving both official bilateral creditors — governments and their policy banks — and commercial creditors — banks, bondholders, commodity traders and others.
If successful, it will solve a big shortcoming of the DSSI, widely criticised for failing to deliver relief from commercial lenders, which the scheme called on to participate on comparable terms with bilateral creditors if asked to do so by debtor countries.
Debtor countries have been reluctant to make that request. According to the IMF, just three countries had approached commercial lenders by the end of September, with no agreements reached. Not a single request for relief has been made to bondholders under the DSSI.
The reason is that many indebted countries have spent years enacting the kind of reforms mandated by the IMF and by investors, for which part of the reward is access to international bond markets. They are reluctant to give up that lifeline. Asking bondholders to delay payments would constitute a default and risk locking them out of bond markets for years.
Pakistan, the first country to ask for relief under the DSSI, said it would not ask for private sector involvement and that, if bilateral relief were made conditional on securing commercial relief, it would reconsider its request.
As a means of securing relief from the private sector, then, the DSSI was a non-starter. Critics say this reveals the lack of co-ordination among the parties involved, including the G20, the Paris Club group of creditor nations, the IMF and the World Bank.
“Part of the problem was not knowing who was in charge,” says one senior official involved in negotiations over the initiative that continued beyond its launch. “There were so many different entities trying to steer things and they were literally not talking to each other.”
The discussions over how to respond to the crisis have also been affected by the growing rivalry between the US and China.
China has emerged this century as the biggest bilateral lender to many developing countries, providing nearly $150bn to governments and state-owned companies in Africa, for example, as it sought to secure commodity supplies and win contracts for infrastructure projects.
Beijing has been criticised for a lack of transparency in its loans, made by a variety of state and quasi-state lenders on both concessionary and commercial terms, and for failing to participate fully in the DSSI.
Among its most vocal critics is David Malpass, president of the World Bank. He said last month that it was “frustrating” that China was not participating more fully, and that its lenders charged higher interest rates than others with “very little transparency” in their loan contracts.
China has rejected such criticism. Its foreign ministry said last month it was “actively committed to fully implementing” the DSSI.
In fact, China has contributed $1.9bn out of $5.3bn of relief delivered by the DSSI this year according to an internal G20 document seen by the FT, much more than any other country. Three of its lenders are understood to have renegotiated a further $6.7bn of repayments due from Angola.
Critics say the comments made by Mr Malpass — nominated by Mr Trump for the World Bank job and seen as a Trump loyalist — were designed for consumption in Washington and have been unhelpful at a time when China, by co-operating on debt at the G20, is edging towards greater multilateral engagement than has been its habit in the past.
One senior European official says an aversion to multilateralism under Mr Trump meant the World Bank is co-operating less with other institutions. “It is quite hard to work with the World Bank at the moment,” the official says, expressing annoyance at Mr Malpass’s comments.
Even if there is frustration at the slow progress so far, some observers believe that the political support for more substantial measures is improving.
The G20 summit to be held online this weekend is one chance to build momentum. Mr Jadaan, the Saudi finance minister, says the common framework is a “historic step towards bringing the world together, to look at its less fortunate segments and help them in the medium and long term. It’s not only the debt, it’s the root cause you need to look at.”
Mr Rediker at the Brookings Institution agrees that the meeting marks a significant moment. “It is a big step to get China to sign up to a common framework, make no mistake,” he says.
But he has reservations about how effective it will be. “You still end up with the member countries and the private sector having to enforce it, and there will be costs in doing so,” he adds.
Vera Songwe, UN under-secretary general and head of the UN Economic Commission for Africa, says the last thing developing countries need is enforced private-sector involvement in debt relief.
“A common debt framework that confounds public concessional borrowing with commercial market access would undermine Africa’s recovery,” she says.
Instead, low- and middle-income countries need concessional lending and grants — sub-Saharan Africa alone will need $100bn a year for the next three years, she said. “Otherwise, we are heading for debt default on a scale never seen.”
Uneca is one of several organisations and individuals backing the call for a new issue of SDRs by the IMF. Others include the UN Conference on Trade and Development, the People’s Bank of China, European and African heads of state and a host of debt and poverty campaigners, along with the IMF itself.
The appeal of SDRs for developing countries is that they fill a gap in the toolkit available to advanced economies: money creation. While advanced economies have been able effectively to print money by buying their own bonds in a world of low or negative interest rates, most developing countries cannot do that without risking instability, inflation and worse.
SDRs, a form of virtual currency, promise an immediate cash injection with none of the conditionality attached to IMF programmes. The IMF has issued them in past crises and proponents say it should do so now. But the proposal was vetoed by the US in April on the basis that it would benefit rich countries more than poor ones, although critics suggest the US was motivated by an unwillingness to see funds going to rivals such as China and Iran.
For many, the issuance of SDRs is the biggest single test of global co-operation in the crisis.
“SDRs mean giving unconditional liquidity to developing countries,” says Stephanie Blankenburg, head of debt and development finance at Unctad. “If advanced economies can’t agree on that, then the whole multilateral system is pretty much bankrupt.”
The hope in such quarters is that the incoming administration in the US will deliver on its promise of greater engagement in world affairs and that the issue of SDRs will be reopened for discussion.
Even with increased support, however, the IIF’s Mr Adams warns against complacency.
“Even before Covid, the world was in the midst of a great wave of debt,” he says. “We are going to need sober, thoughtful leadership in how we manage those debts going forward. At the technical level there are a lot of enlightened people in position, but will we have the political leadership? I don’t know. I hope so.”
Additional reporting by Andrew England
Signs of inflation emerge as Chinese producer prices leap
For investors and governments eager to spot any sign of inflation as the global economy recovers from the coronavirus pandemic, Chinese factories are a good place to look.
The country this week released figures showing that the price of raw materials and goods leaving its factories rose 6.8 per cent year on year in April, its fastest pace of growth in more than three years.
For almost all of 2020, China’s producer price index was in negative territory as Covid-19 suppressed demand. The recent and sudden rise was partly driven by the comparison with a year earlier and, with consumer price rises still below 1 per cent, the overall inflation picture remained mixed.
But the data was nonetheless a sign of pockets of price increases emerging across China’s rapid recovery, where higher overall inflation is expected this year. It also reflected a global rally in commodity prices that has been supported by China’s voracious demand as well as hopes that other big economies will bounce back, too.
“A combination of China and external factors led to this PPI surge,” said Robin Xing, chief China economist at Morgan Stanley. “It’s like a perfect storm.”
China’s PPI index is made up of prices of producer goods, such as wardrobes or washing machines, that factories sell to shops before they are sold on to consumers.
It also includes the prices of raw materials and commodities, such as coal, when they are sold from extraction companies to businesses that use them to make goods.
It was the latter that drove the recent surge in Chinese producer prices. Global commodity prices, which collapsed last year in the early stages of the pandemic, have since rebounded. Iron ore this week hit its highest level on record, while oil prices have recovered sharply from last year.
Xing estimated that 70 per cent of the April PPI increase was driven by commodities. That rally was also tied to China’s recovery, which has been backed by strong industrial growth and a construction boom that led to record output of steel last year.
As such, the data reflected both the pace of China’s recovery as well as a global commodity rally that it helped fuel and now extends beyond it.
For policymakers, one crucial question is whether higher producer prices will feed through to consumer prices. China’s consumer price index was just 0.9 per cent in April — its highest level in seven months, but far from a level that would generate immediate fears of broader inflation within China.
While economists expect a rise in CPI inflation in China this year, they suggested that any reaction from the People’s Bank of China to this week’s data was unlikely. The portion of the producer price index that represents the prices at which businesses buy consumer goods, as opposed to raw materials, was up only 0.3 per cent year on year.
Analysts at HSBC said transmission from PPI to CPI would be “limited”, allowing policymakers to remain “accommodative”.
Ting Lu, chief China economist at Nomura, forecast CPI inflation to rise to 2.8 per cent by the end of the year, with “pass-through” effects from PPI. But he suggested that the PBoC was unlikely to tighten in response to PPI, and that higher raw material prices instead posed a risk to Chinese demand and the wider recovery given controls on credit availability.
“For a typical borrower, $1bn six months ago may be enough to buy steel and cement to finish one project, but today it’s [maybe] not,” he said.
While the PBoC has not increased official rates since lowering them last year, the Chinese government has nonetheless tightened credit conditions over recent months.
It has also taken measures to rein in both its property sector, on concerns that easier money would encourage asset bubbles, and its steel sector, which has churned out the metal at a rate that threatens Beijing’s environmental commitments.
China’s gradual decarbonisation ambitions — and any production cuts they lead to within the country — are seen as constraints on supply, buoying the price of commodities further.
Beyond raw materials, economists are closely watching other shortages. Iris Pang, chief economist for greater China at ING, said producer price inflation would be followed by chip inflation. A shortage of semiconductors, she said, was already beginning to drive price increases for consumer products such as washing machines and laptops.
While the PPI index showed a much weaker increase in consumer goods than for raw materials, on a month-on-month basis there were notable rises. Durable consumer goods were up 0.4 per cent month on month in April, the fastest pace of growth since at least 2011, according to CEIC, a data company.
Apart from domestic construction, part of the demand for raw materials has been to drive the production of goods for export to western countries.
Data on Friday showed Chinese exports leapt 32.3 per cent year on year in April. But even when compared with April 2019, before the pandemic, the rise was about 16 per cent on an annualised basis, Morgan Stanley estimated.
Competition between producers in China meant this did not necessarily imply inflation for consumers overseas. Instead, China’s recent PPI jump hinted at just one of the global effects of western responses to the pandemic.
“If you try to figure out what is the end demand here for this PPI recovery, it is global stimulus,” said Xing. “External demand led to China’s export recovery, [and] now it’s far beyond its potential growth”.
Covid batters India’s aspiring middle classes
When Ram Prakash died after a feverish and breathless week, his wife and 16-year-old daughter’s heartbreak was compounded by fear that the modest middle-class safety net he had knitted together might be ripped apart.
The 53-year-old, a tax adviser to local businesses, was one of the millions who had joined India’s fast-growing middle class in recent decades. Their rising incomes, better education and consumption powered one of the great global economic success stories.
But the calamitous second wave that claimed the life of Ram, the family’s breadwinner, has shattered the Prakashes’ hopes for the future. “Our life was going good but now it’s all over,” said Uma, his widow.
Economists warned that the latest outbreak could have long-term ramifications for middle-class Indians, whose rising consumption was expected to be the country’s growth engine for many years.
“India, at the end of the day, is a consumption story,” said Tanvee Gupta Jain, UBS chief India economist. “If you never recovered from the 2020 wave and then you go into the 2021 wave, then it’s a concern.”
India reported more than 320,000 Covid-19 infections and 3,800 deaths on Monday. Experts maintain that both figures are vastly undercounted.
The disease has heaped suffering on Indians irrespective of background. Yet this time, it has also hit hard an aspirational middle class whose newfound privilege previously helped shield them.
Public-health experts pointed to signs that after widespread infection among the urban poor last year, sectors of society including the comparatively affluent were more vulnerable this time round. This was compounded by the near-collapse of private health services on which they relied.
“You’re affluent but you can’t get a hospital bed. You’re affluent but you can’t get oxygen,” said Saurabh Mukherjea, founder of Marcellus Investment Managers. “That’s deeply disorientating.”
India’s middle class was already severely weakened by the recession that followed last year’s lockdown, even if they were better protected from the virus.
The Pew Research Center found that 32m people fell out of India’s middle class — defined as those earning between $10 and $20 a day — in 2020. That represented more than half of those added to the category since 2011.
India’s economy was expected to roar back before the second wave struck. For middle-class Indians on the brink, such as the Prakash family, this second shock may prove too much.
Ram, the tax consultant, had moved his family to a one-bedroom house in a humble New Delhi neighbourhood, bought a car and sent his daughter to a low-cost private school, hoping she could become a chartered accountant.
“He gave us so much when he was alive,” said Vasundhara, his daughter. “I only hope I will be able to continue my studies.”
Experts have debated what drove the high caseloads among middle class and rich Indians during the second wave.
Anup Malani, a professor at the University of Chicago, suggested that those populations proved more susceptible, especially as new variants spread.
In Mumbai, for example, studies last year found that about 50 per cent of slum residents had Covid-19 antibodies, compared with less than 20 per cent in more affluent surrounding neighbourhoods.
This is believed to have left the middle and upper classes more vulnerable, particularly to severe disease, researchers said. Doctors have reported similar trends elsewhere in India.
“The first wave largely infected poorer populations,” Malani and two co-authors wrote this month. The second wave “is disproportionately composed of individuals who are from non-slums”.
Researchers said more data were needed but other susceptible populations could include those outside cities, such as in poor rural areas with shoddy healthcare where the virus was wreaking havoc.
The outbreak was so sudden that it overwhelmed even India’s best hospitals, including private facilities in cities such as Delhi or Bangalore.
Fewer than 1 per cent of Delhi’s 5,800 Covid-19 ICU beds are available, while crippling shortages of oxygen have contributed to countless deaths.
After Ram Prakash’s oxygen levels dropped, his family spent two frantic days ferrying him to six separate hospitals — both private and public — in a desperate bid to find treatment.
In the end, they brought him home. Ram died on April 27.
Uma and Vasundhara fear economic ruin. They have a shortfall of Rs30,000 ($408) to meet immediate expenses, including school fees and the mortgage on a neighbouring unit that Ram bought as an office.
“Right now our worry is just to survive, to get food and meet our daily expenses. But there won’t be enough,” said Vasundhara.
They plan to sell their car and Uma, a former Sanskrit teacher, wants to find work again. But they worry hopes of a better life are over.
“We had never imagined this could happen to us,” Vasundhara said. “We just can’t get our head around this.”
Reeves promotion underlines Labour shift to centre ground under Starmer
When Sir Keir Starmer promoted Rachel Reeves to shadow chancellor late on Sunday night it emphasised his determination to defy the left of the Labour party and move in a more “centrist” direction after a series of disappointing local election results.
Reeves is unpopular with many “Corbynista” members — supporters of the party’s former hard left leader Jeremy Corbyn — because of comments she made in 2013 when she was shadow work and pensions secretary. That controversial moment saw her promise to be “tougher” than the ruling Tories on benefit costs.
Her role as vice-chair of Labour Friends of Israel is also contentious among many Corbyn supporters who oppose the actions of the Israeli government. And while other MPs agreed to serve on the Labour front bench under the Corbyn leadership in 2015, Reeves was one of a handful who refused to do so.
Starmer first considered making Reeves shadow chancellor when he became leader in April last year — only to drop the idea, fearing that it would prompt a backlash from left-wingers.
Yet it would be wrong to characterise the 42-year-old MP for Leeds West — a former junior chess champion — as a “Blairite” or “rightwinger” even in Labour terms.
During the last parliament she chaired the business select committee, a position she used to interrogate corporate failure by Carillion, the collapsed contractor. She meanwhile struck out as a writer, penning two books about female MPs.
In 2018, she used a speech in London’s East End to call for a new series of wealth taxes to raise more than £20bn a year — shifting the fiscal system from income to property. The then shadow chancellor John McDonnell resisted the idea, amid concerns over a backlash from middle class Labour voters.
Indeed, there was a moment in 2019 when some of Corbyn’s aides — including policy adviser Andrew Fisher — advocated bringing Reeves into the shadow cabinet.
Sharper edge but no shift in strategy
In the short-term her promotion to one of the most important roles in the shadow cabinet may give a sharper edge to Labour’s top team but not necessarily bring a shift in strategy.
That is because the party creates its election manifestos through a drawn-out process called the “national policy forum” over several years.
Starmer has eschewed creating new policies on the hoof in favour of a focus on rebranding, telling voters Labour is “under new management” after the electorally disastrous Corbyn, who lost two general elections in 2017 and 2019 — the latter by the biggest margin in nearly a century.
The opposition leader’s popularity rose last year as he forensically attacked the ruling Conservative government over pandemic failures. But with the Tories enjoying a bounce from the vaccine rollout, he was criticised during the local elections for a lack of a positive policy vision. Some Labour insiders blame that for the setback at the polls — in which the party lost 326 council seats and was defeated in the Hartlepool by-election.
On Monday, many colleagues were positive about the promotion of Reeves after a year in which she has been one of the most high-profile figures on the front bench.
As shadow Cabinet Office minister, she took the fight to the Conservative government over its spending on personal protective equipment — expressing anger at the many contracts given to Tory contacts. She has also kept up the pressure on the Conservatives over the Greensill scandal.
Colleagues said as shadow chancellor she will emphasise the need for Labour to show it can be trusted to run the economy — an area of traditional political weakness for the party.
‘Competent and sensible on the economy’
That would continue the theme set by Dodds, who said in a speech in January — using the word “responsible” 23 times — that Labour would offer “responsible economic, fiscal and monetary policy”. The Starmer team has already distanced itself entirely from Corbyn’s 2019 election manifesto, with £83bn of annual public spending increases.
In an interview with the Financial Times last year Reeves struck a similar tone, saying the party needed to be “competent and sensible” on economic matters.
Yet she is not expected to return the party to the “austerity lite” approach of Ed Balls, shadow chancellor under former leader Ed Miliband, who promised not to increase borrowing even for capital expenditure.
One ally said Reeves could be expected to draw up a “transformative” programme — involving changes to the tax system and the decarbonisation of the economy — while also reassuring the public that Labour would spend people’s taxes wisely.
Starmer’s reshuffle at the weekend was thrown into chaos after allies of Angela Rayner, the deputy leader, leaked she was being demoted from her job as party chair after the local election failures. The ensuing political storm overshadowed some more positive electoral results on Saturday in cities such as Manchester, London and Bristol.
Rayner turned down the job of shadow health secretary and instead took Reeves’s old job as shadow Cabinet Office minister as well as “shadow secretary of state for the future of work”.
On Monday, after a two-hour shadow cabinet meeting, Starmer was seen buying a coffee at Westminster with Rayner in an attempt to put on a public show of unity after a weekend of acrimony.
Starmer’s bungled reshuffle has sown deep discontent among senior Labour MPs. “You can’t understand how angry people are,” said one. Allies of Rayner said she felt a “deep sense of betrayal”.
The reshuffle saw Dodds move to party chair and Alan Campbell promoted to chief whip with the departure of 70-year-old Nick Brown.
Lisa Nandy, shadow foreign secretary and MP for Wigan, told colleagues she was convinced Starmer was planning to sack her and it was only a rearguard action by her supporters that persuaded him to drop the plan.
Nandy warned Starmer that she would quit the Labour front bench, rather than be demoted to another role.
Referring to the plans to demote first Rayner and then Nandy, one Labour MP said: “What genius would think it a good idea to demote not one but two women representing northern seats?”
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