MUMBAI: Derailed by the coronavirus pandemic, global central banks are trying to rescue the ailing global economy by pumping massive funds. Stimulus measures such as increased direct fiscal spending, bond market purchases, and direct cash transfers, have been doled out.
Drawing comfort from these steps, global equities have recovered most of their recent losses. Riding on the stimulus hope, equity market mood remains buoyant, despite fear of a second coronavirus wave lurking.
The depth of damage on jobs, incomes and company profits isn’t completely known. So, a widely held view is that more easing may be in the offing, which is a sentiment booster for equity markets. However, continued flow of easy money would have repercussions on rising public debt, which should not be ignored.
In a report published on 22 June, ratings agency Moody's Investors Services Ltd has warned of a sharp increase in the public debt of various advanced nations.
“Globally, government debt burdens are rising sharply as nominal GDP growth slumps and deficits widen markedly. On average across 14 advanced economies, we expect debt/GDP to rise by around 19 percentage points this year. The rise in debt is larger, more sudden and broad-based than during the Global Financial Crisis (GFC), reflecting the acute and global nature of the coronavirus shock," it said. GDP stands for gross domestic product.
How this massive increase in public debt worldwide unravels is anybody's guess, although investors appear to be brushing these concerns aside.
It should be noted that earlier in this month, over 30 countries, including India, saw ratings downgrade or outlook change by Moody’s. Concerns about weak economic recovery, high public debt and rising stress in financial systems, prompted the agency’s move.
The debt-to-GDP ratio, is used to gauge a country's ability to repay its debt. So, obviously an elevated debt/GDP ratio doesn't bode well for the credit ratings of any country. However, experts feel that developed economies are better placed to service higher public debts than their emerging market counterparts.
In his blog dated 19 June, Vanguard Americas chief economist Roger Aliaga-Díaz said, “In fact, everything central banks are doing to help their economies right now increases the odds of a sustainable debt scenario going forward. And while our view on developed markets is sanguine, our outlook for emerging markets—which we don’t foresee being able to simply grow themselves out of debt—is far more challenging."
In its mid-year global outlook, Morgan Stanley Ltd said, unlike earlier, the recovery will be led by developed markets (DMs), since emerging markets (EMs) face tighter fiscal constraints.
“But in contrast to historical patterns, we see this recovery being led by DM markets for three reasons: i) Greater policy/funding scope (and arguably fiscal/monetary regime shifts) in the US, Europe and, to a lesser extent, Japan; ii) An overhang of higher corporate leverage across EM equities; and iii) Less spillover from Chinese stimulus to commodity exporters, given the relative size/structure of stimulus versus 2008," the multinational research house said on 16 June.