(Agence Ecofin) – The recovery started by the world economy is running five risks, according to S&P Global Ratings. These are debt, a possible return to the pandemic, the inability to repay debtors, economic nationalism, and the decline in funding for the SDGs. Africa resists.
Five major risks lie in wait for the recovery started by all of the world’s economies after the wind of panic that was sowed by covid-19, according to S&P Global Ratings. As the second half of 2020 begins, the pandemic continues to spread and punctuate decision-making in both economic and monetary policy.
With 10 million people already affected and the risk of a resurgence of the disease in the countries previously affected, the fight to contain the virus remains the priority until an effective vaccine or treatment is found. As a result, the focus is now on how the economic recovery will unfold.
“The pandemic is likely to leave deep scars on the global economy. A harder blow than initially expected in emerging markets, especially for India, now pushes our forecasts to a contraction of 3.8% of world GDP in 2020 [pire que les 2,4% précédemment prévus]. The terrible effect of prolonged confinements on jobs and consumer confidence also means that the recovery will take longer than expected in 2021-2023, with a permanent loss of production ”, explain analysts at S&P Global Ratings.
5 major risks on the road to recovery
In the end, five main risks are identified on the way to the recovery of the world economy. The first is that of an abrupt end to budgetary and monetary measures to support economies. This would not only harm consumers and small businesses, but could also disrupt financial markets.
Thanks to this reaction from governments and central banks, investors have settled in an optimism that is not justified by an analysis of the ability of companies to repay their debts. However, particularly with regard to corporate debt, the number of companies whose rating is in the lowest speculative range is significant today, with a debt volume of $ 2,700 billion in the United States, and of $ 1.7 trillion in Europe.
The solvency of companies is the second risk that the markets will have to manage. With the shock of covid-19, central banks and governments first provided an important response to the lack of liquidity. The rules have been relaxed for banks and even businesses and individuals, so as not to fall into a total crisis. Now that things are back on track, the major challenge is that of the ability of businesses and households to generate enough income to repay their creditors.
When we look at the global growth figures published by the International Monetary Fund, we note that in Europe and North America, it will take until 2023 to feel the gains of the economic recovery. In sub-Saharan Africa, this gain is forecast within a small margin of 0.2%. The only place in the world where we can hope for a cumulative growth gain of more than 3% is Asia Pacific, and more precisely in China. This solvency risk is worsening and deserves to be followed.
The third risk is that of the debt of both developed and emerging countries. It increased by $ 11 trillion between January and the end of April 2020. Even China, which is on a good trend in terms of economic growth, faces significant debt. According to data from Refinitiv, a platform for Reuters, Chinese borrowing on the capital market reached $ 1100 billion. On the scale of this country, if it becomes difficult to repay these resources in the long term, the risk will be great for investors.
The fourth risk is that of the rise of economic nationalism. The culmination of this risk stems from the conflict between the US and China. An escalation of trade tensions between these two countries will have major ripple effects on several emerging economies of the world, including that of African countries supplying raw materials to both camps.
The fifth risk is that of achieving the sustainable development objectives. The question is whether governments, particularly those in Africa, which are strongly concentrated in the fight against covid-19, will still be keen to strengthen the processes for fighting extreme poverty. The other question is whether the developed countries in particular will embark on a campaign to resume growth without any consideration for the environment.
Insurance, banks and governments of Africa trapped
Africa so far has been resilient both to the health ravages of the coronavirus and to its economic consequences. Some analysts like Charlie Martial Ngounou, who heads the Afroleadership Association in Cameroon, justify this by the flexibilities that the informal sector allows in Africa. “In fact, we live the same risks. But from an informal perspective, they are less rigid than in other countries. In Africa, the local grocer may suffer from not being paid after several weeks and on reimbursement, he will not charge interest. In Europe or in the USA it is an impossible scheme ”, did he let know.
If one of these five shocks were to occur in a lasting manner, Africa’s economic and financial systems would not be able to provide an appropriate response. Insurance contracts in the region and the size of companies in this sector are not suited to risk management, of the magnitude created by covid-19. Commercial banks, even under normal circumstances, are quite restrictive in lending, and cannot do better.
African governments are completely suffocated and now have little room for maneuver. Faced with Cameroonian parliamentarians, while defending the draft amending budget, the country’s finance minister cited four top priorities for the government, and the repayment of domestic private debt is not one of them. In Nigeria, Ghana, Kenya and South Africa, governments have seen fiscal deficits soar to unsustainable levels in the long run.