Transcription
Hey there, I'm Scott Mlan. This is Counting the Cost on Al Jazer, your look at the world of business and economics.
Well, the bond market is sending governments a stark warning. Investors have been walking away as the Iran war stokes fears of another inflation shock. From Washington to Lagos, borrowing costs are climbing. So, is the world heading into a new debt crisis? Mortgages, car loans, and credit cards, they could all get more expensive. The impact of the Middle East conflict is now hitting businesses and households. So, when debt piles up and governments tighten spending, who ends up paying the price? Well, government bonds are under pressure and the bill could soon reach your kitchen table.
Borrowing costs across major economies have hit their highest levels in nearly two decades. Investors have been pulling back from government debt and demanding higher returns. They worry the Iran war could keep oil prices and inflation elevated. The International Monetary Fund now warns global debt could approach World War II levels. At the center of it is the United States with its huge influence on the world's borrowing costs. All this could mean higher mortgage repayments, car loans, more expensive credit, and rising business costs passed on to consumers. For developing nations borrowing in dollars, it puts even more pressure on stretched budgets. Vinton Monahan reports.
The Iran war is stoking inflation worldwide. The crisis at the straight of Hormuz has disrupted 20% of the world's oil and gas supplies and that's pushing up prices. It's a pattern being seen the world over. Petrol prices and energy costs have risen in many countries and that impacts the rest of their economies. As production and transport becomes more expensive for businesses, profit margins go down and costs are passed on to consumers.
In the US, 30-year Treasury bond yields hit their highest since 2007. This tends to set the trend elsewhere. Yields are also up in the UK, Japan, and other major economies. It's a sign that the market expects more inflation and that central banks may have to raise interest rates to control it. Both are negative signs for economic growth. But they also point to another challenge. The International Monetary Fund is warning that the Iran war could stoke a rise in global debt levels. Many nations are spending to cushion the impact of inflation on consumers, but doing this will stretch public finances. The IMF is predicting global debt levels will equal world economic output by 2029, for the first time since World War II.
Among the major economies, the US national debt was 123.9% of GDP last year. By 2029, that could be as high as 135.5. Chinese debt stood at 99.2% 2% of GDP last year. That's expected to increase to 120.3%. The IMF says ballooning debt could eventually require higher taxes and cuts to public spending. Nations could soon find themselves in a vulnerable position, paying to service interest on large debts, paying high bond yields to raise more funds and finding it harder to spend big to protect consumers if another crisis arises. Benton Mahan, Al Jazer for counting the cost.
Well, treasuries, guilts, boons, these are all terms for government bonds. Right now, the price of bonds is dropping because investors are moving away from government debt. That means yields, the returns investors make from them are going up. So, what are bond yields and why do they matter to the average person if they keep rising? Well, bonds are used by governments to raise money. The higher the yield, the more the government pays investors to borrow money. US 30-year bond yields have passed 5%, a level not seen since 2007. High bond yields can tell us what the market is expecting in the future. It signals high inflation in the coming years and that the Fed is likely to keep interest rates high. If people buying bonds think this will eat into their profits, they'll want higher returns on their investment. The bond yield also serves as a benchmark for borrowing and the rest of the economy. If bond yields are high that pushes up interest rates being paid by consumers on mortgages, car loans and other debts.
All right, let's disc discuss this further with our panelists. From London is Bilal Hafi, a markets analyst and CEO of Macrohive. From Cape Town is Jarvin Naidu, political economist at Oxford Economics Africa. And also from London is Phipe Lraine, economist and author of Aftershock, Reshaping the World Economy After the Crisis. Gentlemen, thank you so much for being here. Bal, we'll start with you. I want to show you a graphic of G7 bond yields and you can see since the global financial crisis in 2008, so for more than a decade, they actually went down. Now they're going in the opposite direction. So my question is, is it an oversimplification be to say this is all about supply and demand? In other words, there's a lot of government debt on the market, but maybe not so many buyers.
I think at one level that's correct that there are there's too much supply and not enough demand. The the the question then is why is there not enough demand and uh the re one of the reasons is concerns about inflation. Um another another reason is because of the level of debt overall. So so of course they always could be demand somewhere uh that would drive uh yields lower but the question really is why why is there not enough demand?
But I guess there's two possibilities here. I mean, is it that there are sure bets, better return on your money elsewhere, or do you think that people are actually concerned about the government's ability to repay that debt?
Yes, I think that uh number one, people are looking at other assets that they think are more attractive. Um, recently that's been equities, especially American equities. Um, last year it was gold. Um, so people are looking at alternative uh investments. Um there has at various points been concerns about the ability for the government to pay back debts, but that hasn't really lasted very long because in the end people think that a country, an economy as large as the US and the fact that the Fed can ultimately print money, that the US always will be good uh for paying back its debt because of course the US can always just print money, but that's another discussion that we'll get to in a minute.
Uh Jarvin, if you think that G7 bond yields are high, I want to show you some examples of what they're like where you are in Africa. So, uh if you look at bond yields in Egypt, 21% right now, Zambia almost 17%, Uganda 15.5%. These are for 10-year uh bonds. And I wonder what do these rates say about the investors faith in the government's ability to actually pay back or pay the interest on those bonds?
Yeah. Uh, thanks Scott. I think building on what uh, Bilal has said, uh, it's it's worrying particularly for African developing markets in the global south, those bond yields are something quite that we're quite concerned about here at Oxford in some of our forecast. It just tells us that these markets are quite concerned that African countries won't be able to even service the interest. As you mentioned, the higher yields are also resulting in a stronger dollar and African countries are already facing shortages with forex. So now with these higher yields uh increased on the uh serviceable interest these are these are quite concerning that we may run out of dollars. Countries that are very sensitive to forex changes for example on the continent uh for example Nigeria that I cover and Zambia as well they are really start even here in South Africa they have concerns over foreign uh forex capacity an inability to pay back this. So it's quite worrying by by showing you that graph and it's spread across the continent. It's not just uh some of the stronger economies in Africa. The weaker ones are really going to struggle. Malawi, for example, is really running short on its forex as well. So, there's some real serious concerns there.
Philipe, when you look at the global bond market, is it blinking a warning or is there a way for governments to maybe calmly correct course?
I think that uh there is a very big warning going out here. Um the immediate reason obviously is the stalemate in the straight of four moves and the worries about uh inflation rising in the near term. But the underlying fragility is due to the very high levels of government debt, very high levels of government borrowing and seemingly very little political will to do anything about it. So the underlying fear uh is that governments are not going to be able to get uh to grips uh with um their fiscal challenges uh and that we're going to see higher inflation not just in the short term but also in the medium term and that independent central banks which are meant to keep a lid on inflation are actually going to go easy on it in order to enable uh governments to remain solvent.
All right, I want to ask you guys about US debt specifically because the US national debt is soaring which could have ripple effects of course. US debt levels are equivalent to more than 120% of annual GDP. That's almost $39 trillion. Trillion with a T. That's more than all the economic output of the country in a year. It hasn't been this high since World War II. The debt really spiked after 2005. Some of that was racked up after the global financial crisis and the CO 19 pandemic. The expenses of caring for an aging population, delivering tax cuts, and servicing the debt itself have also contributed. If you break it down by population, this is wild. The US owes around $114,000 for every single person in the country. Paying interest on that debt costs nearly a trillion dollars each year. That is more than Washington now spends to fund defense or Medicare. Around 68% of US debt is held domestically. The other 32% is held abroad. Japan, the UK, and China are among the biggest foreign holders. Analysts warn demand is shifting away from US bonds, and investors are demanding higher returns over fierce debt levels may become unsustainable.
So, Bilo, my question is for you. Is this sustainable?
I think in the long run, it's not sustainable. And aside from the level of the debt that you just showed us in that chart, another important input to that is what's the level of uh the government's fiscal deficit or budget balance every year. How much is it borrowing every year to add to that overall debt? And since COVID, the US has uh been running very large annual budget deficits, which is unusual outside of wartimes. And so when the US was doing well after the recovery from COVID, there was an opportunity to scale back that borrowing. but the US didn't and now that we have the crisis in the Middle East and more defense spending it's borrowing even more. So this is uh particularly worrying for the long run and this is really the the larger concern for markets as a whole that when the times were good the opportunity was there to scale back that debt problem but that opportunity wasn't taken and now today where there's so much more pressure for spending on multiple different fronts. There's uh even more borrowing going on per year now.
That's an excellent point. That's what I want to ask you about Philipe. I mean we're headed according to the IMF to toward World War II levels of debt. The point that Bilal is making is that the difference here is that we're not in a world war right now. So is this the fault of governments, Philipe, for continuing to borrow money even when times were good?
Well, I mean, of course, we've had a series of crises which pushed up the underlying level of debt, which is the financial crash, COVID, and the Ukraine war. And you're absolutely right to say and Bill is absolutely right to say that then there was an opportunity when times were better uh to get a lid on spending and instead of that borrowing has continued to sore uh in the United States also indeed in in China and uh in other countries and uh therefore there is very reasonable worries about are there any circumstances short of a crisis in which governments are going to find the political will to do that. So you see in the United States where you know Donald Trump uh is being reckless and the US Congress is giving a blank check to do so. You see other countries such as France where the government is trying uh to curb borrowing but it doesn't have a majority in parliament and so it's not able to do so. Or you see Britain uh where there's a Labor government that's also trying to get a lead on spending but there's a prospect of a new prime minister coming in and borrowing more. And so whether there's a desire to do so or not, there's a question about the ability to keep a lid on on on borrowing and therefore worries about are governments instead going to choose the option of inflating their way their debts away. And if you've borrowed at a certain rate of interest and in fact that is uh inflated away uh through higher prices, then you're going to be very unhappy and government and government bond markets are reacting ahead of that.
I just want to delve into this a little bit deeper with you. this idea of inflating our way out of it because it seems to me that if you spend more money, situation gets worse. You spend less money, maybe the economy shrinks, situation gets worse again. Option three is your idea, print more money, but that devalues your currency. Uh but it makes the debt comparably less daunting. Do you think that that is the only option the governments have at this stage, Philipe?
Well, the ideal option obviously is faster economic growth. faster economic growth would boost tax revenues. Uh it would um reduce uh social spending and it would obviously uh if we're talking about a debt to GDP ratio mathematically reduce the debt to GDP ratio. Uh the problem is is that there aren't immediate sources of growth. There's a hope in the United States that the AI boom might translate into a step change of productivity and that might be a get out of jail card. uh in Europe uh and in the UK uh you see you know very very slow growth uh potentially reforms uh to complete the EU single market or to uh planning reform in the UK that could deliver some boost uh to growth but apart from that with the pressures of demographic aging um and uh with all sorts of vested interests uh blocking reform that might deliver growth there's intense pessimism about the ability to do so. So there you're left with either inflation or what we saw after the Second World War, which is financial repression. Governments artificially driving down interest rates in order to make it um uh easier for them to manage their debts. And you can do that through regulatory means for example requiring financial institutions to hold more government debt.
Jervin, I want to ask you about the impact on African countries when bond yields go up in the United States. Presumably investors in African debt want to see a higher return because the risk is comparatively high. Is that right?
Yeah. Uh the risk are comparatively high based on the financial architecture of our markets. We are really s sensitive to these global energy shocks as a result of the war. Also the the way in which the global economy is structured that is if the American economy or the US economy gets a bit of a cold it then pushes down into Africa. So we're seeing lots of heightened pressures around investors. some of the people that we talked to here at Oxford and some of the clients they're very concerned about how African countries are going to be able to manage this debt with the higher bond yields and again as I mentioned earlier the higher forex the the value of our for example rand to the the dollar or the Egyptian pound or the naira is becoming quite concerning and also just domestically all our reser most reserve banks on the continent are now shifting from a a pattern of you know they thought they were going to be cutting interest rates to now lifting them or raising them and this again raises the costs and already as a contemporary there's massive cost of living issues around the world but in Africa particularly and we already seeing some early signs of the Scott in Kenya there were quite aggressive protests yesterday over the fuel crisis which is all this big moltov cocktail which is going to hit particularly the global south Africa and lam more than I would say Europe and and probably Asia.
I want to ask you guys about the new Federal Reserve chair his name is Kevin Walsh below. President Trump wanted Kevin Walsh in and Jerome Powell out because he thought that Kevin Walsh would cut interest rates. Um, and I just wonder given that inflation is still high in the United States. It's 3.8% or or thereabouts right now, does Kevin W have a choice but to raise interest rates? If you look at the economy in the US, uh, not only is inflation high, but also growth has been remarkably solid and resilient as well. And so based on all of that, it would suggest that the Fed should raise interest rates. And in fact, if you look at market expectations, they are expecting the Fed to raise rates. However, when you listen to Kevin Walsh outside of that testimony that he gave to Congress in general, he has been giving indications that he may well not increase interest rates. And some of the rationale there is number one, he thinks that productivity is picking up significantly. So that will dampen long-term inflationary pressures. And another factor he's talked about is whether you can rely on current statistics on inflation, whether there are other better measures of inflation. So So in the end, the proof will be in the pudding, but at least from his speeches running into that testimony, he was giving more indications of not raising rates even though the US has that level of inflation that you mentioned.
So, as we have discussed, debt is also a major problem that's holding back developing nations. The G77, a grouping of 132 developing countries are spending $8 trillion a year just servicing their debts. This amounts to 35% of government spending on average. For many, those interest payments are bigger than their health budgets. The United Nations Secretary General has called for global action on debt relief. A UN report this year said reducing debt servicing costs for the poorest countries could free up $900 billion a year for development. Jervin, is there any universe where these kind of debt levels are sustainable?
No. Uh as uh both Philipe and and Binal mentioned it's it's not especially in African context. the you know if we just take it back to co postco African governments weren't able to spend and grow their economies and stabilize as fast as Europe and America. So we still have still long-lasting impacts affecting certain sectors in the economy. So again you still have those pressures that are still underlying and also uh Scott given some of the the way in which African governments work right there is u governments employ large sectors of the population the public bills are much higher so even things like you know uh there are some suggestions that you know to deal with some of this debt is arising you know as a as a result of the conflict is to cut certain basic things you know um reduced uh levies or fuel the fuel levies for example are causing a problem in reducing food levies or reducing government expenditures on social projects. For example, in South Africa, we still have the CO 19 grant still in effect because the economy just did not rebound from that. In Nigeria, you had a fuel levy. Uh Kenya brought back a fuel levy. These are the it's it's really really difficult and we we are we are hamstrung by the way this this works and the only way we can do this is looking at the way in which the which the G77 can work together to find a way to more sustainably deal with the death and and and and address structural issues in the global economy. Other than that we're just in this neverending negative loop where we're just stuck and we're just waiting for another chaotic world event to affect impact Africa and the developing world.
I want to ask you about Kenya specifically because it's been in the news. So Kenya in the upcoming budget will spend almost half of their budget just servicing their debt. Now you also have rising fuel costs there. There are protests on the street on the streets in Kenya. They have now become deadly. Do you worry about a situation where you know if things get even worse that things could really get ugly?
Yeah, I know. I'm I'm really worried about Kenya. Scott is one of my countries I actively cover and we saw in 2024 when there were the mass uh uh protest against the IMF and the the budget there were very violent protest and I'm worried it's heading in that same direction. Now Kenya and IMF are still negotiating a new deal and you know this is just broadly something to think about in in countries that have already you know Kenya as an example that already have social pressures. Once we have these economic pressures compiled with the social pressures, it then makes a very volatile political environment and next year there's elections in Kenya. So, President William R will try and make a plan to try and get reelected. But I'm quite concerned about the amount that they're servicing to debt and now there are concerns that they might introduce a stronger levy, a petrol levy to help alleviate the fuel issues. But the problem is the IMF said that if they introduce that, uh, they will then take away some of the the dealings with the IMF. So it's it's quite concerning in Kenya and Kenya is a major hub in East Africa for transport for goods and for the global well for the African economy. So I'm quite worried that it's heading in the wrong direction and you've got elections coming up in less than uh a year. So it's heading in in very much the wrong direction. Scott, all the trends are pointing towards uh increased social, political and economic pressures in Kenya.
Bila, we are also seeing a trend amongst developing countries where they are swapping their US denominated debt for debt in Swiss Franks or Chinese yuan because the interest rates are better. We're also seeing other developing countries really stock up on their gold reserves. And I wonder what that tells us about the status of the dollar, the future status of the dollar, I guess, as the global reserve currency. Is that in doubt?
I think there are some doubts that are building up about the status of the dollar. Um and you are seeing as you say this move into gold and and other currencies Swiss Frank, Chinese yuan. But even more than that, there is a push now for many countries and regions to try to find alternative payment systems that you know that sits outside of the US financial infrastructure and plumbing. And if that does happen, that would really challenge the US dollar because outside of reserve allocations, central banks holding different assets, the the biggest reason why the US dollar is the dominant world currency is because the whole financial infrastructure of the world is in dollars. Wherever you go in the world, you can always transact in dollars. And uh if countries do whether it's Europeans, the Chinese or other Asian countries do start to bring uh build other financial infrastructure that sits outside of the of the dollar infrastructure, financial infrastructure, then that would be the real challenge to to the dollar dominant story.
Philip, I want to ask you quickly if I can about the UK specifically because President Trump has been quite critical of the UK government for not tapping into their own domestic energy uh in the North Sea and instead relying heavily on imports. As a result, energy costs have gone up. Um a a and you're also dealing with a situation where the benefits bill in the UK has really ballooned and the government hasn't taken real meaningful steps to do much about it. So given those two things, are you surprised that bond yields are highest in the UK of any country in the G7 right now?
Well, I I think that the oil and gas doesn't make much difference to bond yields. I mean, even if you tried to tap most of the noisy gas that remains, it wouldn't make a huge difference uh fiscally, but I think there are legitimate worries about um UK public finances. uh if you remember a few years ago there was a short-lived prime minister called Liz Truss who caused a fiscal crisis and since then uh there has been a so-called premium applied to uh UK government bonds uh where people are no longer sure that it's a well one country and indeed start to worry about having a succession of weak uh uh prime ministers following each other an economy that seemingly doesn't have a growth model and even now um with a government with a huge political majority an inability to grapple with the long-term issues that are holding uh Britain back. So I do think there are legitimate worries to be had about um UK government debt and you know the UK is no longer a particularly large economy and therefore holding UK government debt if you're a foreign investor is an optional thing. It's not a mustave as it is with US treasuries. Uh so throw all that together and that is an unpleasant cocktail for the UK government.
Jarvin, we're talking about British mortgage holders, American consumers, African taxpayers. None of these groups cause the problem that we're in right now, but all of these groups are in some way or another paying the price. I wonder if you think or if you can understand people who may look at this situation and think, look, the system is rigged. The global financial system is rigged against the little guy.
Yeah, I know 100% Scott and just building on your earlier example of Kenya, a lot of the protests that were happening yesterday, some of the common uh some of the common reports talking to some of the local transport operators was like um you know they don't care about what's going on in other parts of the world that governments need to isolate themsel but that just also shows that you know that there's a sort of disconnect for maybe for the average person and I don't want to uh insult anyone's intelligence generally speaking uh people don't necessarily understand how We're so interconnected. You know, the the globalization process at the end of World War II and the fall of the of the Berlin wall, end of cold war is really hyper interconnected the world. And if something happens in some part of the world in you know in the US or in Asia Middle East it affects everywhere. And the problem is as you mentioned it's not structured correctly. And as you had you know bil talking about currencies this global push to move away from the dollar uh you know move away from the swift system. These are all things that people that are fed up with the system are thinking about but it's so difficult to to structurally challenge that and change it. But yes, people on the ground, you know, monitoring all the protest in Kenya, even here in South Africa, people are still don't quite understand why does a problem in Iran, in the Middle East, between the US, Israel, and Iran affect us here, for example, in South Africa. So again, it's really shows that the system is not fair to those, you know, particularly after the end of the cold war. It's really, really affects us.
Gentlemen, I wish we had more time for this discussion. Bilal Hafi, a markets analyst and CEO of Macrohive, Jerevan Naidu, political economist at Oxford Economics Africa, and Philipe Lraine, economist and author of Aftershock, Reshaping the World Economy After the Crisis. We so so appreciate you all being here today. Thank you. And that is it for our show. You can get in touch with us on X. My handle is scott Mlan and make sure to use the hashtag AJCTC when you do or drop us an email counting the costal.net. That's our address. But there's more for you online at aljazer.com/ctc. That'll take you straight to our page which has individual reports, links, and entire episodes for you to catch up on. That is it for this edition of Counting the Cost. I'm Scott Mlan from the whole team here in Doha. Thank you so much for joining us. The news is next here on Alazer. See you.