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Bridging the ‘great finance divide’ in developing countries

Over the last two years, the world economy has been rocked by multiple shocks—from the COVID-19 pandemic to the war in Ukraine. But not all countries…

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By Shari Spiegel, Oliver Schwank

Over the last two years, the world economy has been rocked by multiple shocks—from the COVID-19 pandemic to the war in Ukraine. But not all countries and people have been impacted in the same way. As highlighted in the2022 Financing for Sustainable Development Report” (FSDR), a financing divide is sharply curtailing the ability of many developing countries to respond to shocks and invest in recovery.

In the wake of the COVID-19 pandemic, developed countries could finance massive fiscal response packages (worth 18 percentage points of GDP) at very low interest rates, backstopped by their central banks. Developing countries were more constrained. The poorest countries in particular were forced to cut spending in areas such as education and infrastructure, contributing to a more protracted crisis. Even before the fallout from the war in Ukraine, 1 in 5 developing countries was projected not to reach 2019 per capita income levels by the end of 2023, with investment rates not expected to return to pre-pandemic levels for at least two years.

This subdued investment recovery further widens large climate and Sustainable Development Goal (SDG) investment gaps. Yet, many countries are in no position to finance the necessary investment push. At the beginning of 2022, 3 in 5 of the poorest countries were at high risk of or already in debt distress, and 1 in 4 middle-income countries were at high risk of fiscal crisis. Rising energy and food prices due to the war in Ukraine have put additional pressures on fiscal and external balances of commodity importers, and tightening global financial conditions are raising risks of a systemic crisis. Debt sustainability concerns, which tend to arise at lower levels of debt in developing countries, translate into higher risk premia. Even in countries where debt is considered sustainable, the high cost of borrowing precludes needed investment.

Costs and terms of capital in developing countries

Developing countries’ average interest cost on external borrowing is three times higher than that of developed countries (Figure 1). In the low interest environment of the last decade, developed countries borrowed at an interest cost of an average of 1 percent. Least developed countries (LDCs), which have increasingly tapped international markets in recent years, borrowed at rates over 5 percent, with some countries paying over 8 percent.  This has dragged up their average borrowing cost and translated into less fiscal space: LDCs dedicate an average of 14 percent of their domestic revenue to interest payments, compared to only around 3.5 percent in developed countries, despite the latter’s much larger debt stocks (Figure 2).

While this high cost of borrowing reflects higher perceived risks, there is evidence of an additional premium associated with sovereign borrowing. Over the last 200 years, the average annual return of foreign currency debt to investors has been around 7 percent, even after accounting for losses from defaults, exceeding the “risk free” return on U.S. and U.K. bonds by an average of 4 percentage points. Since the start of the emerging market ”bond finance era” around 1995, total returns to investors (net of losses from defaults) have been even higher, averaging almost 10 percent or around 6 percentage points over the risk-free rate—a historical high.*

Foreign currency bonds more than compensate investors for the risks they face—even through periods of repeated financial turmoil in developing countries. Indeed, external sovereign bonds have been the best performing asset class since 1995, outperforming other asset classes (such as equities or corporate bonds) even after adjusting for both defaults and risk (measured by market volatility). While sovereign spreads and risk premia may seem removed from people’s lives, in the case of sovereign debt, they have a direct impact. High investor returns equate to high borrowing costs for countries, diverting government expenditures from public investment and social services.

Figure 2. Average debt stocks and debt servicing costs, in percent of GDP and revenue

A multifaceted policy response

On the right terms, debt financing can enable countries to respond to emergencies and fund long-term investments. Productive investments in turn enhance growth and fiscal capacity, thus generating the resources to service debt sustainably. On the other hand, for countries with large debt overhangs, additional lending can be counterproductive, and debt relief and more grant financing indispensable. The challenge is to increase access to affordable long-term financing (and grants where appropriate) and to use proceeds productively. While there is no one solution to increase countries’ fiscal space, steps to do so include national actions, international public finance, and efforts to improve terms and reduce credit spreads associated with commercial borrowing. The “2022 Financing for Sustainable Development Reportputs forward recommendations in four areas to bridge the “great finance divide.”

First, countries should reduce risks and ensure that all financing is aligned with the SDGs and climate action. The efficiency of public investment is a key determinant of its growth and debt sustainability impact, and efficiency gaps remain sizeable in many countries. Linking public investment decisions to a medium-term fiscal and budget framework and debt management strategy—for example, in the context of an integrated national financing framework—can reduce the volatility of financing for capital expenditure. But national actions alone cannot solve systemic challenges.

Second, access to additional long-term affordable international public finance is critical. Official development assistance commitments must be met and Multilateral development banks’ (MDBs) lending should be expanded, including through capital increases and rechanneling of unused special drawing rights. MDBs themselves can improve lending terms, for example, through ultra-long-term loans and systematic use of state-contingent clauses in their own lending. In addition, the entire “system of development banks” should be strengthened: MDBs can extend capacity support to national institutions, and MDBs can in turn benefit from national banks’ knowledge of local markets.

Third, the international community can take measures to improve developing countries’ borrowing terms in markets. As global sources are dominant drivers of volatility of capital flows, addressing leverage and volatility in the international financial system is essential. Steps can also be taken to reduce the premia associated with the high cost of sovereign borrowing, such as by strengthening the information ecosystem and lengthening time horizons. Extending the horizon of credit ratings (which are often only for up to three years) and debt sustainability assessments would provide insights for long-term oriented investors.

Fourth, the international community urgently needs to step up efforts to resolve unsustainable debt situations. A multilateral debt relief and restructuring initiative may become necessary as global interest rates and risks of a systemic debt crisis rise. Systemic solutions should be pursued now, before large debt servicing payments come due in 2023. They should be discussed in an inclusive forum that brings together creditors and debtors. The United Nations could provide such a platform.

* Note: Meyer, Josefin, et al. 2019. Sovereign Bonds since Waterloo. Quarterly Journal of Economics (forthcoming).

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Economics

Reduced myocardial blood flow is new clue in how COVID-19 is impacting the heart

Patients with prior COVID may be twice as likely to have unhealthy endothelial cells that line the inside of the heart and blood vessels, according to…

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Patients with prior COVID may be twice as likely to have unhealthy endothelial cells that line the inside of the heart and blood vessels, according to newly published research from Houston Methodist. This finding offers a new clue in understanding covid-19’s impact on cardiovascular health.

Credit: Houston Methodist

Patients with prior COVID may be twice as likely to have unhealthy endothelial cells that line the inside of the heart and blood vessels, according to newly published research from Houston Methodist. This finding offers a new clue in understanding covid-19’s impact on cardiovascular health.

In a new study published today in JACC: Cardiovascular Imaging, Houston Methodist researchers examined the coronary microvasculature health of 393 patients with prior covid-19 infection who had lingering symptoms. This is the first published study linking reduced blood flow in the body and COVID-19.

Using a widely available imaging tool, called positron emission tomography (PET), researchers found a 20% decrease in the ability of coronary arteries to dilate, a condition known as microvascular dysfunction. They also found that patients with prior COVID-19 infection were more likely to have reduced myocardial flow reserve – and changes in the resting and stress blood flow – which is a marker for poor prognosis and is associated with a higher risk of adverse cardiovascular events.

“We were surprised with the consistency of reduced blood flow in post covid patients within the study,” said corresponding author Mouaz Al-Mallah, M.D., director of cardiovascular PET at Houston Methodist DeBakey Heart and Vascular Center, and president elect of the American Society of Nuclear Cardiology. “The findings bring new questions, but also help guide us toward further studying blood flow in COVID-19 patients with persistent symptoms.”

Dysfunction and inflammation of endothelial cells is a well-known sign of acute Covid-19 infection, but little is known about the long-term effects on the heart and vascular system. Earlier in the pandemic, research indicated that COVID-19 could commonly cause myocarditis but that now appears to be a rare effect of this viral infection.

A recent study from the Netherlands found that 1 in 8 people had lingering symptoms post-covid. As clinicians continue to see patients with symptoms like shortness of breath, palpations and fatigue after their recovery, the cause of long covid is mostly unknown.

Further studies are needed to document the magnitude of microvascular dysfunction and to identify strategies for appropriate early diagnosis and management. For instance, reduced myocardial flow reserve can be used to determine a patient’s risk when presenting with symptoms of coronary artery disease over and above the established risk factors, which can become quite relevant in dealing with long Covid.

Next steps will require clinical studies to discover what is likely to happen in the future to patients whose microvascular health has been affected by COVID-19, particularly those patients who continue to have lingering symptoms, or long COVID.

This work was supported, in part, by grants from the National Institutes of Health under contract numbers R01 HL133254, R01 HL148338 and R01 HL157790.

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For more information: Coronary microvascular health in patients with prior COVID-19 infection. JACC: Cardiovascular Imaging. (online Aug. 16, 2022) Ahmed Ibrahim Ahmed, Jean Michel Saad, Yushui Han, Fares Alahdab, Maan Malahfji, Faisal Nabi, John J Mahmarian, John P. Cook, William A Zoghbi and Mouaz H Al-Mallah. DOI: www.doi.org/10.1016/j.jcmg.2022.07.006

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Spread & Containment

War, peace and security: The pandemic’s impact on women and girls in Nepal and Sri Lanka

The impacts of COVID-19 must be incorporated into women, peace and security planning in order to improve the lives of women and girls in postwar countries…

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Nepalese girls rest for observation after receiving the Moderna vaccine for COVID-19 in Kathmandu, Nepal. (AP Photo/Niranjan Shrestha)

Attention to the pandemic’s impacts on women has largely focused on the Global North, ignoring countries like Nepal and Sri Lanka, which continue to deal with prolonged effects of war. While the Nepalese Civil War concluded in 2006 and the Sri Lankan Civil War concluded in 2009, internal conflicts continue.

As scholars of gender and war, our work focuses on the United Nations Security Council Resolution 1325 on women, peace and security. And our recently published paper examines COVID-19’s impacts on women and girls in Nepal and Sri Lanka, looking at policy responses and their repercussions on the women, peace and security agenda.

COVID-19 has disproportionately and negatively impacted women in part because most are the primary family caregivers and the pandemic has increased women’s caring duties.

This pattern is even more pronounced in war-affected countries where the compounding factors of war and the pandemic leave women generally more vulnerable. These nations exist at the margins of the international system and suffer from what the World Bank terms “fragility, conflict and violence.”

Women, labour and gender-based violence

Gendered labour precarity is not new to Nepal or Sri Lanka and the pandemic has only eroded women’s already poor economic prospects.

Prior to COVID-19, Tharshani (pseudonym), a Sri Lankan mother of three and head of her household, was able to make ends meet. But when the pandemic hit, lockdowns prevented Tharshani from selling the chickens she raises for market. She was forced to take loans from her neighbours and her family had to skip meals.

Some 1.7 million women in Sri Lanka work in the informal sector, where no state employment protections exist and not working means no wages. COVID-19 is exacerbating women’s struggles with poverty and forcing them to take on debilitating debts.

Although Sri Lankan men also face increased labour precarity, due to gender discrimination and sexism in the job market, women are forced into the informal sector — the jobs hardest hit by the pandemic.

Two women sit in chairs, wearing face masks
Sri Lankan women chat after getting inoculated against the coronavirus in Colombo, Sri Lanka, in August 2021. (AP Photo/Eranga Jayawardena)

The pandemic has also led to women and girls facing increased gender-based violence.

In Nepal, between March 2020 and June 2021, there was an increase in cases of gender-based violence. Over 1,750 incidents were reported in the media, of which rape and sexual assault represented 82 per cent. Pandemic lockdowns also led to new vulnerabilities for women who sought out quarantine shelters — in Lamkichuha, Nepal, a woman was allegedly gang-raped at a quarantine facility.

Gender-based violence is more prevalent among women and girls of low caste in Nepal and the pandemic has made it worse. The Samata Foundation reported 90 cases of gender-based violence faced by women and girls of low caste within the first six months of the pandemic.

What’s next?

While COVID-19 recovery efforts are generally focused on preparing for future pandemics and economic recovery, the women, peace and security agenda can also address the needs of some of those most marginalized when it comes to COVID-19 recovery.

The women, peace and security agenda promotes women’s participation in peace and security matters with a focus on helping women facing violent conflict. By incorporating women’s perspectives, issues and concerns in the context of COVID-19 recovery, policies and activities can help address issues that disproportionately impact most women in war-affected countries.

These issues are: precarious gendered labor market, a surge in care work, the rising feminization of poverty and increased gender-based violence.

A girl in a face mask stares out a window
The women, peace and security agenda can help address the needs of some of those most marginalized. (AP Photo/Niranjan Shrestha)

Policies could include efforts to create living-wage jobs for women that come with state benefits, emergency funding for women heads of household (so they can avoid taking out predatory loans) and increasing the number of resources (like shelters and legal services) for women experiencing domestic gender-based violence.

The impacts of COVID-19 must be incorporated into women, peace and security planning in order to achieve the agenda’s aims of improving the lives of women and girls in postwar countries like Nepal and Sri Lanka.

Luna KC is a Postdoctoral Researcher at the Research Network-Women Peace Security, McGill University. This project is funded by the Government of Canada Mobilizing Insights in Defence and Security (MINDS) program.

Crystal Whetstone does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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Economics

Target Sets Sights on Holiday Season, Has Plan for High Inventory

Target said that it still expects spillover from inventory rightsizing to the tune of $200 million in the third quarter.

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Target said that it still expects spillover from inventory rightsizing to the tune of $200 million in the third quarter.

Target's  (TGT) - Get Target Corporation Report strategy is paying off as the company's stock falls on heavy volume following its earnings release. 

Normally, a profit miss as wide as Target's, 39 cents per share vs. expectations of 72 cents per share, would result in a bigger drop than Target's, but the retailer has been prepping the market for this miss all summer. 

The inventory the company built up during the height of the pandemic, as Americans shopped more from home, needs to go, and the only way get rid of the excess product is deep discounts. 

"Back in June, we announced that our team would be undertaking a bold effort to rightsize our inventory position in the categories for which demand patterns have radically changed," CEO Brian Cornell said during the company's earnings call. "While this decision had a meaningful short-term impact on our financial results, we strongly believe it was the best path forward."

Now, looking forward the company sees some overhang for the third quarter, but expects a big holiday season ahead. 

While some fear a recession and what it might do to the economy, Target is convinced that the holiday season will be strong.

Image source: John Smith/VIEWpress.

Target Aims for Holiday Season

While Target is focused on the back-to-school season currently underway, the company expects "spillover" from its inventory issues to be present during the third quarter to the tune of $200 million. 

But the company's own checks suggest that its shoppers are excited about the holiday season. 

"The one thing that seems to be very consistent is a guest and consumer who says they want to celebrate the holiday seasons so we certainly expect that they are going to be celebrating Halloween this year and actively trick or treating and hosting parties with friends and family," Cornell said.

"We know they're looking forward to Thanksgiving and they're going to look forward to celebrating the Christmas holidays and that comes down each and every week as we survey consumers and talk to our guests so that gives us great optimism for our ability to perform during these key holiday seasons"

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Not only does Target expect a strong quarter, but the company also expects favorable comps as fourth quarter headwinds from a year ago aren't present this time around. 

"Guests already have their sights set on upcoming holidays and seasonal moments in Q3 and beyond," Cornell said.

Target's Q2 Collapse

Target said adjusted earnings for the three months ending in July were pegged at 39 cents per share, down 89% from the same period last year and well shy of the Street consensus forecast of 72 cents per share.

Group revenues, Target said, rose 3.5% to $26 billion, essentially matching analysts' estimates of a $26.04 billion tally. Target said same-store sales rose 2.6%, again shy of the Refinitiv forecast of 3.2%, while operating margins fell to 1.2%, below the group's July guidance of a 2% level. 

Earlier this summer, Target cautioned that its bigger-than-expected 35% build-up in overall inventories over the first quarter would trigger price cuts, adding that deeper discounts would be needed to shift the excess goods onto a customer base that was already pulling back on discretionary spending.

Walmart  (WMT) - Get Walmart Inc. Report, Target's larger big box rival, said Tuesday that improving spending trends, as well as actions the group has taken to shift excess inventory, will ease some of the pressures it expects to face in terms of overall profits over the back half of the year.

Walmart said adjusted earnings for the three months ended in July came in at $1.77 per share, down one penny from the same period last year but well ahead of the Street consensus forecast of $1.62 per share.

Group revenues, the company said, were tabbed at $152.9 billion, an 8.4% increase from last year that topped analysts' estimates of $150.81 billion. U.S. same-store sales rose 6.5% from last year, the company said, firmly topping the Refinitiv forecast. 

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