Economy

Rising debt levels, structural lapses dampen emerging markets’ investment prospects

Presently emerging markets (EMs) are facing hard times as the region recorded massive capital outflows worth $5.7 billion in May. Worst still, investment growth in the region according to the David Malpass-led World Bank is expected to trend downwards in near term.

The EMs attracted investments worth $9.7 trillion in 2018, a third of the region’s GDP. However, the Washington-based Bank cited escalating debt levels which raise concerns for fiscal sustainability, fragile global growth on the heels of renewed trade war, and structural lapses as threats to investment prospects of EMs.

“The rising trade tensions have impacted negatively on sentiments towards risky assets like equities. Investors are pulling funds out of risk assets to riskless assets, causing more woes for the emerging markets” said Yinka Ademuwagun, research analyst at United Capital Plc.

The continual deceleration in investment growth in EMs mirrors slowing private and public investments, with China accounting for large chunk of the slowdown.

However, investment growth to EMs picked up between 2017 and 2018 supported by expanded global manufacturing and trade activities and increases in oil and metal prices. Investment growth in commodity- importing and exporting nations within EMs climbed to 5.5 percent and 3.2 percent, respectively in 2018.

Investment growth in the region is projected to slow to 3.9 percent in 2019, from 4.2 percent in 2018, but expected to rebound in 2020 and 2021, to be triggered by faster growth in commodity exporters and easier financing conditions by major central banks.

The renewed trade tantrum between the world’s two biggest economies, and slowdown in several advanced economies and growing public debt, constitute downside risk to global growth, as the Bank revised the current year’s growth forecast to 2.6 percent.

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Rising debt level is envisioned to subdue investment growth particularly if global financing conditions tightens, with many emerging market economies experiencing worsening debt dynamics and limited space, and debt servicing accounting for a rising share in their revenue.

The Bank noted that easing in global financing conditions as a result of dovish policy stance and U.S Federal Reserves and European Central Bank might help boost investment for a while, and stressed the need for EMs to channel funds to high quality investment projects to accelerate growth, and ensure debt financing does not compound the existing debt burden.

As the U.S Federal Open Monetary Committee will meet next week, analysts expect the Fed to maintain a dovish stance, to foster growth.

“Global central bankers are turning dovish and this due to the fact there is need to spur growth in the world economy. So, rate outlook appears dovish in the near term, a tailwind for emerging markets,” Ademuwagun positioned.

The Bank cited key structural constraints such as poor financial sector development, government ineffectiveness, poor business environment, infrastructural decay and political instability that could stall investment, which emerging economies must strive to address.

The weak investment prospects in EMs begs the question whether economies in the region can even achieve the Sustainable Development Goals (SGDs) by 2030, the target date for their achievement.

Low and middle-income countries (LICs) will require an average investment worth $2.5 trillion (N765trn) trillion a year to achieve the infrastructure-related SDGs as regard electricity, transport, water, environmental protection and sanitation, according to International Monetary Fund (IMF), which represents 4 percent of EMs’ 2030 GDP and over 15 percent of LICs 2030’s GDP.

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Source: By Israel Odubola

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