A woman walks past a promotional poster for the virtual 2020 Annual Meetings outside the ... [+] International Monetary Fund at their headquarters in Washington, D.C. on October 13, 2020. ANDREW CABALLERO-REYNOLDS/AFP via Getty Images Blessed are the young, Herbert Hoover said, for they shall inherit the national debt. Hoover’s observation has new relevance 88 years after Donald Trump’s ignominious exit from the White House. Not only because the U.S. just had a brush with the 1930s Depression that his failings helped make “great.” But because kids who haven’t been born yet will be paying off the Covid-19 era debt growing before our eyes. This isn’t a moral or ideological observation. Really, what else are governments to do but deficit spend as growth collapses and unemployment surges? Yet here in Asia, it’s worth wondering how the legacy of all this debt affects public spending on education, health, infrastructure and policies aimed at increasing innovation and productivity. The numbers are already mind-numbing. From what governments admit globally, pandemic rescue moves added about $24 trillion to the global debt mountain in 2020, pushing IOUs to a record $281 trillion. It sure does make you wonder if, say, Covid-19 variants outsmart vaccines, the global economy will be too big to fail or too big to save. Or in developing Asia’s case, too big to avoid underfunding investments in future generations to avoid the “middle-income trap” and social unrest. In a new report, the International Institute of Finance highlights Asia’s role in this borrowing binge among emerging economies. Overall, IIF notes, developing nation debt-to-gross-domestic-product ratios topped 250% in 2020, up from 220% in 2019. MORE FOR YOU In emerging Asia, debt-to-GDP tops 298%, up from 266% in late 2019. China, South Korea and Thailand find themselves with the dubious honor of being in the top five economies with the biggest year-on-year increases. Here, India deserves attention, too, reporting a 17.3% jump in its government debt ratio. Generally, though, Asia saw many of the biggest debt-ratio jumps among emerging economies across government, non-financial corporate, and household sectors year-over-year in the last three months of 2020. There are many ways all this borrowing complicates Asia’s future. One is increased vulnerability to a repeat of the 1997-1998 crisis, which had its roots in excessive borrowing. Another: as debt-servicing costs surge, there is less money to spend on economic hardware—roads, airports, power grids—and economic software—education, training, public health—that will hurt competitiveness in the long run. Finally, crowding out the private sector’s ability to finance new growth opportunities. IIF economist Emre Tiftik worries about “corporate zombification.” As a global recovery gathers pace, he notes, “governments will be developing exit strategies from exceptional fiscal support measures.” To date, government guarantees and moratoriums on debt payments successfully prevented a surge in business bankruptcies. The decline in the number of firms filing for insolvency across many European countries has been extraordinary. Yet, Tiftik warns, “premature withdrawal of supportive government measures could mean a surge in bankruptcies and a new wave of non-performing loans, with financial stability implications for the banking sector. However, sustained reliance on government support could pose systemic risks to the financial system as well. A prolonged period of loan guarantees—coupled with sustained low interest rates—could well encourage still more debt accumulation by the weakest and most indebted corporates.” Bank of Japan's governor Haruhiko Kuroda speaks during a press conference about the monetary policy, ... [+] at the Bank of Japan headquarters in Tokyo on June 15, 2018. MARTIN BUREAU/AFP via Getty Images Here, Japan’s experience these last 30 years is worth heeding. Tokyo shows that even in pre-coronavirus times, it can seem impossible to unwind hyper-aggressive public borrowing and ultralow interest rates. Extraordinary stimulus efforts tend to become normalized rather quickly. Banks, companies, consumers and, of course, politicians get used to free money. That can institutionalize complacency. As economist Lee Jong-Wha at Korea University points out, declining growth raises fiscal sustainability challenges. Among both emerging and middle-income Asian economies, he notes, the International Monetary Fund expects fiscal positions to continue deteriorating The Asian Development Bank, too, says this trajectory will be hard to reverse over time. “At the same time, Lee says, “increased liquidity is stimulating risk appetites, causing asset prices to rise rapidly. Already, some East Asian countries, including South Korea and China, are struggling to constrain real-estate bubbles in major cities, despite tighter mortgage rules. And some analysts have warned that a stock-market correction is imminent, though others argue that low real interest rates and the technology sector’s growth potential justify today’s high equity prices.” In that context, Lee adds, “expectations of fiscal- and monetary-policy normalization following the resurgence of growth and inflation could cause global stock prices to plummet. And a large-scale liquidity withdrawal from emerging-market economies could spell disaster for those Asian economies that are highly exposed to short-term inflows of foreign capital.” Granted, it’s hardly an easy challenge. The last eight-plus decades since the Great Depression taught policymakers that you don’t tighten fiscal policy, Hoover-style, amid weak growth. Yet it’s also vital to plot a way out of unsustainable stimulus and how and when to implement it. “The most important challenge is to find a well-designed exit strategy from these extraordinary fiscal measures,” Tiftik says. That’s easier said than done. Hitting the brakes too soon risks setting back living standards across Asia, particularly as governments wind back Covid-era safety nets. Wait too long and leaders throughout this region will bequeath to their grandkids the bill for 2020. And a future in which this week’s spike in global yields is an all-too-common threat.
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