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November/December 2018

Contents

Editorial

Global economy under threat as politicians lose the plot

Corporate treasurers are no strangers to managing risks to financial and liquidity management but with fears growing that the global economy is heading for another downturn, they are coming under pressure to monitor an increasingly wide array of threats.

There are several potential financial triggers for another recession. Among the most notable are rising US interest rates threatening to call time on emerging market debt – the experience of Turkey being a case in point.

China’s debt of around 250% of GDP is seen by some as an even bigger threat. Yet with China’s debt overwhelmingly attributable to state-owned enterprises and banks and local government, Beijing is well placed to rewrite its national balance sheet.

Beijing is certainly not averse to such action: three such major restructurings have been actioned since 1980, while its central bank bailed out a number of lenders in the 2000s after they had become saddled with bad loans. Furthermore, risks to the global economy from any such debt restructuring should be limited by China’s relatively closed banking system and current account surplus, and high domestic savings rate.

But while financial risks to the global economy are palpable, it’s arguably geopolitics and trade policies that are increasingly driving them, or at the very least exacerbating them. The IMF in its latest Financial Stability Report, one of the most detailed analysis of global banking and markets since the financial crisis, warns that “dangerous undercurrents” are now a rising threat to the world economy.

Trump’s trade wars and the undermining of global co-operation by nationalist policies have become a real threat to global growth, with the likes of Brexit, the crisis in Argentina and Turkey and the US standoff with Iran over its nuclear programme adding to the turmoil.

The global synchronised upswing of 2017 is over, with the IMF predicting 45 of the least wealthy countries – accounting for 10% of the global economy – will see their living standards fall further behind those of rich countries over the next five years.

Ten years ago, politicians and institutions like the IMF placed the blame for the crisis squarely on the shoulders of “irresponsible” banks and “weak” regulators. This time around it looks like it will be more the result of geopolitical miscalculation and misguided trade policies, leaving us, oddly enough, to rely on central bankers, to pick up the pieces again.