We must not be caught naked

We need to maintain our focus on the structural fault-lines in the economy

As investors seek higher-yielding assets against a backdrop of slowing growth in the US and Europe, sentiment towards emerging markets such as SA could be changing — which would come as a welcome reprieve from the years of being under the piercing gaze of global investors and ratings agencies.

Such a climate will be helpful for a country in desperate need of some fixed investment spend from the private sector, because it could help boards and their CEOs to sell the idea of sinking capital into a local project.

That’s the immediate benefit of a shift in sentiment, but should it happen there might be a temptation to concentrate less on the deep structural reforms that are needed with regard to everything from power generation to providing additional spectrum.

Lessons to be learnt

We should heed the lessons that are to be learnt from Europe’s political deterioration in the years since the height of the sovereign debt crisis.

At the height of the old continent’s crisis — during which most of Europe faced worrying debt levels in the years following the global recession — an analyst from one of France’s leading banks, in a state of desperate resignation over the problems that had blighted his continent for months, was quoted as saying that his biggest fear was that the mess required politicians to fix it.

That was almost a decade ago and while tales of Greece and its debt woes that threatened the future of the EU no longer dominate the financial pages, the region and its many politicians are no closer to agreeing to fiscal union, which perhaps is the only way to ensure stability for the eurozone group of nations. The politicians haven’t fixed anything in truth.

They were able to avoid confronting the unpalatable option of fiscal union — in other words, integrating the fiscal policy of all eurozone nations — because of the change in sentiment towards developed markets towards the end of 2012.

Fed rides to the rescue

As US growth appeared to be on a surer footing, the Federal Reserve prepared markets for an end to the era of cheap dollars. This led investors to seek opportunities in developed markets, taking money out of riskier climes such as SA, Brazil and Turkey.

Debt costs, which at a certain point had most of southern Europe on its knees, eased. Stronger equity markets meant its corporations weren’t in as much trouble as they were in the aftermath of the global recession.

Debt concerns, however, didn’t suddenly disappear; it was just that servicing the debt became a little easier.

Since the financial crisis of 2008, global debt has in fact continued to rise — by 74%, according to McKinsey.

Government debt accounts for about 43% of this debt.

The debt problem is still very much alive and a reality. With the International Monetary Fund this week revising its global growth forecast for 2019 downward to 3.3% — its weakest level since 2007 — I wonder how long it will be till debt concerns are front and centre again. It is only a matter of time.

What the developed world seems to have ultimately benefited from is the successful experimentation by the Fed with quantitative easing.

I am sure it will be used again, and it has proved successful in delaying the final reckoning with the world’s rising addiction to debt.

In Europe, some of the more difficult structural reforms that were being mooted at the time to safeguard the future of the EU could be shelved for later.

Politicians espousing nationalism and populism have grown their support across the region over the past decade, and in some cases have attained positions of power.

Over the past five years, when emerging markets have come under the immense strain of weak commodity prices and a strong dollar, few economies in Europe have strengthened their defences against a possible “black swan” event or a natural slowdown in growth.

While Brexit may be grabbing headlines, the Italian economy is struggling to emerge from a recession, despite more positive global sentiment towards Europe.

If there is improved sentiment towards emerging markets, we should use the time to maintain our focus on the structural faultlines in the economy so that when the tide goes out again, we aren’t naked.

Derby, a former Business Times editor, hosts Power Business on PowerFM