WB: Problem of “White Elephant”

Global debt is becoming a bigger worry as the global policy tightening cycle takes hold, a top boss at the World Bank warned Monday.

 “After a decade of low interest rates, the corporate and public debt in many places has ballooned to a staggering $164 trillion,” Kristalina Georgieva, chief executive officer of the World Bank, said in an interview in Singapore on Monday with Bloomberg Television.

“With interest rates going up, that attention on debt sustainability has to be stronger.”

Central banks across the world are under pressure to follow a Federal Reserve that’s raising interest rates faster than initially anticipated, putting particular stress on emerging markets and developing economies.

The need for structural policy changes, including responses to waves of anti-globalization, remains great as policy makers in most economies haven’t taken sufficient action during the extended period of low borrowing costs, Georgieva said.

“We don’t see many countries taking advantage of this period of strong economic growth to carry forward structural reforms,” she said. “And our advice to countries is, do not wait. Good times may not last—they usually do not last forever.”

World debt, including household debt, ballooned to $237 trillion in the fourth quarter of 2017, according to calculations by the Washington-based Institute for International Finance. That’s more than $70 trillion higher than a decade ago.

Georgieva said countries must take a hard look at the affordability of projects that they’re undertaking, including in infrastructure, amid still fairly low interest rates. She warned of the “white elephant” problem and said the World Bank is working harder to attract private-sector investors for “blended finance” projects.

Solving the Problems

The World Bank CEO made the following comments in the interview:

- “So far what we see is that the impact of this worry about protectionism on the world economy is relatively modest” even though the World Bank is concerned about the impact on investor confidence.

- “Our recommendation is focus on where anxiety comes from and solve the problems that are causing this anxiety to turn into a political momentum against trade”.

- US-China trade conflict is “something that has created some uncertainty” but “so far with a strong world economy, it is early to predict where this will take us”.

- With 55% of the world’s population living in cities, more attention must be paid to jobs and social protection for the urban poor; population is rising faster than “the ability of cities to absorb these people” in terms of infrastructure and employment.

- China’s progress on domestic investment has been encouraging, and “great care” must be undertaken to ensure that investment abroad doesn’t aggravate debt.

IMF Recommendation

At the end of May, the International Monetary Fund launched its global debt database. For the first time, IMF statisticians have compiled a comprehensive set of calculations of public and private debt, country by country, constructing a time series stretching back to the end of the Second World War.

The headline figure is striking: global debt has hit a new high of 225% of world GDP, exceeding the previous record of 213% in 2009. So, as the IMF points out, there has been no deleveraging at the global level since the 2007-08 financial crisis.

In some countries, the composition of debt changed, as public debt replaced private debt in the post-crisis recession, but that shift has mostly stopped.

Are these large figures alarming? In aggregate terms, perhaps not. At a time when economic growth is robust almost everywhere, financial markets are relaxed about debt sustainability. Long-term interest rates remain remarkably low.

"But the numbers do tend to support the hypothesis that the so-called debt intensity of growth has increased: we seem to need higher levels of debt to support a given rate of economic growth than we did before," IMF report then said.

Perhaps that is partly because the growth in income and wealth inequality in developed countries has distributed spending power to those with a propensity to spend less than their income.

"That trend has leveled off recently, but the implications are still with us. It also seems that productivity growth has slowed, so a given quantum of investment generates less output than it used to do."

The IMF’s recommendation to governments is that they should fix the roof while the sun is shining: accumulate a fiscal surplus, or at least reduce deficits, in good times so that they are better prepared for the next downturn, which will surely come before too long.