eco TV

EcoTV – March 2021

3/11/2021

TRANSCRIPT // EcoTV – March 2021 : March 2021

FRANÇOIS DOUX

Hello and welcome to the March 2021 edition of EcoTV, the video magazine of BNP Paribas economists. Today we will be looking at the economic impact of the Covid-19 crisis. We will begin with Perrine Guérin and François Faure, and our Focus on the Sub-Saharan region of Africa, which has been hit by the continent’s first recession in 25 years. In our Chart of the Month, Louis Boisset will help us take the pulse of the rebounds in France and Germany. We will then conclude with William De Vijlder and Three Questions on the cause and consequences of the upturn in long-term rates.

Enjoy the show!

 

FOCUS

FRANÇOIS DOUX

Sub-Saharan Africa has been relatively sheltered from the full brunt of the health crisis. Can the same be said from an economic perspective? Perrine Guérin and François Faure are here to tell us more. Hello.

PERRINE GUÉRIN and FRANÇOIS FAURE

Hello.

FRANÇOIS DOUX

Perrine Guérin, has the Covid-19 crisis had a big economic impact on the Sub-Saharan region?

PERRINE GUÉRIN

Yes, the Covid-19 crisis has had a very significant economic impact on the continent, which is expected to report its first recession in 25 years. GDP is expected to contract by more than 3% in 2020. The recovery is also expected to be relatively mild. As a result, the overall wealth in certain countries will not return to pre-crisis levels before 2024 or even 2025. These countries were already struggling with very little fiscal leeway, and the extra spending to manage the crisis and the drop-off in revenues represent major challenges for their governments, whose deficits and debt ratios have soared. As a result, the pandemic has truly hurt the region’s growth prospects.

FRANÇOIS DOUX

François Faure, you are the head of the Country Risk team. What impact will the Covid-19 crisis have on the risk exposure of the Sub-Saharan countries of Africa?

FRANÇOIS FAURE

It is essentially a matter of sovereign risk. As Perrine just pointed out, government debt is the big issue. Average public debt ratios in these countries will exceed the levels of the late 1990s, right before major debt reduction initiatives were launched in these countries.

FRANÇOIS DOUX

Perrine Guérin, what can be done about these debt dynamics? Have any measures been taken?

PERRINE GUÉRIN

Faced with the risk of debt distress, multilateral lenders have responded in a rather unique fashion, not only in terms of speed, but also size, with substantial amounts disbursed through emergency credit lines. At the same time, the Club of Paris creditors have granted a debt servicing moratorium through June 2021 to some thirty African countries. Yet this financial relief is only partial and extremely variable depending on the country. The impact is also temporary: for countries facing a liquidity crisis, these measures help offset the decline in foreign currency inflows and close the gap between funding needs and resources. However, they do not resolve the more fundamental problem of debt solvency. At a time when there is only limited enthusiasm for the emerging markets, several countries may well have to face the prospects of debt restructuring.

FRANÇOIS DOUX

François Faure, tell us more about the situation in 1996 with the debt relief initiatives for the highly indebted poor countries. What are the differences and similarities with the current situation?

FRANÇOIS FAURE

The key similarity is the high level of debt. Debt has reached very high levels in certain countries: even before the outbreak of Covid 19, there was already a sharp rise in the percentage of countries facing solvency problems.

FRANÇOIS DOUX

And the main difference?

FRANÇOIS FAURE

The big difference is the composition of the debt. New creditors have emerged. First, there are holders of international bonds that were largely issued by the emerging countries in recent years. And China, of course, has become a key regional creditor and player in sub-Saharan Africa. China holds at least 20% of the external public debt of these countries.

FRANÇOIS DOUX

My last question, Perrine Guérin. What are the prospects and challenges to come for the Sub-Saharan region?

PERRINE GUÉRIN

Debt will remain a key issue in the years ahead. African countries will need financing to bolster economic recovery, but also to finance sustainable development and growth. They will have to find funding solutions that offer both favourable rates and a sufficiently long maturity so that the return on investment covers the cost of borrowing.

FRANÇOIS DOUX

François Faure, would you like to make a closing remark?

FRANÇOIS FAURE

To conclude, more debt restructurings are anticipated to happen. Certain countries have already requested relief or are getting ready to do so. This is the case for Zambia, Chad and Ethiopia. We hope that for these countries, mutual debt relief efforts will improve compared to the past, and that players like China will participate, and in a more transparent manner than in the past. Other countries have not yet begun debt restructuring because their solvency has yet to be called into question. So far, some countries are still managing to issue debt in the international markets under very favourable conditions, like the Ivory Coast and Benin. Yet these countries must be careful to ensure that the cost of borrowing does not exceed economic growth rates. Unfortunately, one of the consequences of the Covid crisis could be lower potential growth rates.  

FRANÇOIS DOUX

Indeed, we hope to avoid another snowball effect. Thank you François Faure and Perrine Guérin for this update on Sub-Saharan Africa. We will be back in a moment with our Chart of the Month on the economic rebounds in France and Germany, with Louis Boisset.

 

CHART OF THE MONTH

FRANÇOIS DOUX

Where do things stand now in terms of the economic recovery following the Covid crisis? Louis Boisset is here to update us on the situation in France and Germany.

Hello Louis.

LOUIS BOISSET

Hello.

FRANÇOIS DOUX

Our Chart of the Month looks in details the value added in the manufacturing and services sectors. First observation: we still have some catching up to do.

LOUIS BOISSET

That’s right. This chart shows how far we have come in narrowing the loss accumulated in 2020, but also how far there is still to go. At the end of 2020, we were still far from making up all the ground that had been lost over the course of the year. This observation is particularly true for the tradable services sector, which still lags far behind. As we know, health restrictions had an especially negative impact on services. Looking at the latest economic data for early 2021, we come to the same conclusion. Tradable services are really having a hard time catching up, while things are much better in manufacturing, which seems to be on an upward trend.

FRANÇOIS DOUX

How do you explain the disparities between France and Germany?

LOUIS BOISSET

It is mainly due to the structure of their economies. Germany is a major exporting economy. The country, and its manufacturing industry in particular, has been benefiting from the normalisation of world trade, which has returned to pre-crisis level. The French economy, in contrast, is less export-driven, and has thus not benefited as much. This is the main reason for the difference in catching-up momentum.

FRANÇOIS DOUX

Last question: what are the consequences of this lag, for both France and Germany.

LOUIS BOISSET

Many economists, including ourselves, believe that the big impact will be on the job market. So far, the impact of the Covid-19 on the job market has been quite limited thanks to massive fiscal supports. Nonetheless, there is a risk that job market conditions could deteriorate sharply and that the unemployment rate could rise, especially in some key sectors, notably tradable services, as this chart shows. The proportion of jobs at risk is particularly high in retail, transport, and hotel & restaurant services. We will have to monitor closely these developments in the months ahead.

FRANÇOIS DOUX

Thank you, Louis Boisset, for this update on the catching-up movements in France and Germany. We will be back in a moment with Three Questions for William De Vijlder on the bond market and the causes and consequences of the upturn in long-term rates.

 

3 QUESTIONS

FRANÇOIS DOUX

The upturn in long-term rates is a key theme that has been bothering the financial markets since the beginning of the year.

William De Vijlder, hello.

WILLIAM DE VIJLDER

Hello François.

FRANÇOIS DOUX

You have spoken about angry bond markets, and your words were picked up in the press. First question: what is causing the upturn in long-term rates?

WILLIAM DE VIJLDER

Financial market expectations are mainly to blame: inflation is expected to pick up in the months and quarters ahead, and the recovery is also expected to accelerate. Three fundamental factors also come into play: a very accommodating monetary policy, the successful rollout of vaccination campaigns in the United States, and above all, the USD 1.9 trillion rescue plan that is looming on the horizon. Together, these three factors will give the US economy a real boost.

FRANÇOIS DOUX

Indeed, we mainly talk about the US economy, and 30-year Treasury bonds in particular. Second question: what are the short-term consequences of the upturn in the long end?

WILLIAM DE VIJLDER

I would begin by saying the consequences are the same as always. This trend has also affected other bond markets around the world. It is a matter of great importance, notably for the eurozone, where the economic cycle has become desynchronized with regard to the prospects for an economic recovery in the US. At the same time, the financial and bond market cycles are still synchronised. This has triggered several remarks and verbal interventions by the European Central Bank.

There have even been bond market interventions in Australia, since their policy is to target the level of interest rates. The repercussions have been global. As to the United States, however, there is no need to panic. Why? Because inflationary momentum is slow. It should not be exaggerated. There is a limit to how much the yield curve can be expected to steepen in reaction to inflationary fears, or in reaction to expectations of a tightening of US monetary policy.

FRANÇOIS DOUX

My third and final question: what are the medium-term consequences of the upturn in long-term rates? After all, it does signal a decline in bond prices?

WILLIAM DE VIJLDER

This is where things become much more delicate. Indeed, to a certain extent, what we are observing today is rather ironic. For years now, we have been pursuing an extremely accommodating monetary policy in the hopes of boosting inflation. Today, the conditions have finally come together for inflation to pick up. So the markets are beginning to fret. The markets are always worrying about something. For the bond markets, the big worry is “what will the Federal Reserve do next? How will it handle the transition from a very accommodating monetary policy to a more normalised policy? How will it announce the transition?” The Federal Reserve faces a very perilous balancing act and will need to be extremely cautious in all its communications. Why? To avoid creating a shock like the “taper tantrum” of 2013, when the Fed triggered a bond market crisis. Under all circumstances, it must avoid triggering a similar shock, which would have a detrimental impact not only on the financial markets, and of course the stock market, but also on the real economy. The housing market also comes to mind, and the real-estate sector in general, as well as corporate financing conditions.

FRANÇOIS DOUX

US long-term rates remain the key benchmark for the rest of the economy.

WILLIAM DE VIJLDER

That’s right.

FRANÇOIS DOUX

Thank you, William De Vijlder, for this update. We will keep an eye on the evolution of long-term rates. Tune in again in April for another edition of EcoTV.

View more videos Eco TV

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