How countries are raising debt to fight COVID and . . . why developing nations face tougher choices by Shamel Azmeh, Lecturer in International Development, Global Development Institute, University of Manchester is about the pandemic that is affecting all countries as described by the World Bank’s article as a heat-seeking missile speeding toward the most vulnerable in society. That metaphor applies not just to the vulnerable in the rich world; the vulnerable in the rest of the world is not more immune.
How countries are raising debt to fight COVID and why developing nations face tougher choices
COVID continues to ravage societies around the world, and a key issue is how governments can afford to fight it. As economies are disrupted, governments are stepping in to increase their spending to bail out companies, pay the cost of health measures, and subsidise workers’ wages.
Before COVID, when people argued that the state should be able to offer free healthcare and free education, among other services, and welfare measures, a standard political response was that state resources were limited. Asked by a nurse in 2017 why her wages hadn’t increased from 2009 levels, then British prime minister, Theresa May, said: “There is no magic money tree that we can shake that suddenly provides for everything that people want.”
Except, a few years later, the government has not only been able to pay the wages of millions, it has also created rescue packages for thousands of firms and offered people vouchers to eat out in restaurants. A number of European countries have also taken the unprecedented step of underwriting the wages of millions of workers in response to the pandemic.
How is the British state and others capable of this radical increase in spending at a time when revenues from taxes are collapsing?
‘Magic money tree’
The answer to this lies in the debt market. Over the past few months, world governments have drastically increased their borrowing to cover the costs of the pandemic. It might appear logical that the cost of credit will go up during uncertain economic times. The reality, however, is that capital often goes to safer sovereign debt during economic downturns, particularly as the equity markets become unstable and volatile.
Over recent months, rather than struggling to find lenders or having to pay more for debt, the governments of the major economies have been awash with credit at historically low rates. In October, the EU, until now a small player in the debt market (as borrowing mostly is by national governments of member states), began a major borrowing campaign as part of the efforts to fight COVID through the SURE programme (Support to mitigate Unemployment Risks in an Emergency) which was created in May.
The first sale of bonds worth €17 billion was met with what some described as “outrageous demand”, with investors bidding a total of €233 billion to buy them. This intense competition was for bonds that offered a return of -0.26% over ten years, meaning that an investor who holds the bond to maturity will receive less than they paid today.
The EU is not the only borrower that is effectively being paid to borrow money. Many of the advanced economies have been in recent years and months selling debt at negative rates. For some countries, the shift has been dramatic. Even countries such as Spain, Italy and Greece that were previously seen as relatively risky borrowers, with Greece going through a major debt crisis, are now enjoying borrowing money at very low rates.
The reason for this phenomenon is that while these bonds are initially bought by “traditional” market actors, central banks are buying huge quantities of these bonds once they are circulated in the market. For a few years now, the European Central Bank (ECB) has been an active buyer of European government bonds – not directly from governments but from the secondary market (from investors who bought these bonds earlier). This ECB asset purchase programme was expanded to help weather the COVID crisis, with the ECB spending €676 billion on government bonds from the start of 2020 until September.
Other central banks in the major advanced economies are following the same strategy. Through these programmes, those central banks encourage investors to keep buying government bonds with the knowledge that the demand for those bonds in the secondary market will remain strong.
Not everybody, however, enjoys a similar position in the debt market. While the rich economies are being chased by investors to take their money, the situation is radically different for poorer countries. Many poor countries have limited access to the credit market and rely instead on public lenders, such as the World Bank.
In recent years, this pattern began to change with a growing number of developing countries increasing their foreign borrowing from private lenders. Developing countries, however, are in a structurally weaker position than richer peers. The smaller scale of their capital markets mean that they are more reliant on external financing. This reliance means that developing countries rely on raising money in foreign currency, which increases the risk to their economies.
As many developing countries have less diversified exports with a higher percentage of commodities, the price decline in commodities in recent months has increased those risks. As a result, developing countries face a significantly higher cost of borrowing compared to the richer economies.
A few large developing countries, such as Indonesia, Colombia, India and the Philippines, have begun to follow the policy adopted by the advanced economies of buying government bonds to fund an expanding deficit. The risks of doing this, however, are higher than the richer economies, including a decline in capital inflows, capital flight and currency crises. A report by the rating agency S&P Global Ratings illustrated the differences between those two economies:
Advanced countries typically have deep domestic capital markets, strong public institutions (including independent central banks), low and stable inflation, and transparency and predictability in economic policies. These attributes allow their central banks to maintain large government bond holdings without losing investor confidence, creating fear of higher inflation, or triggering capital outflow. Conversely, sovereigns with less credible public institutions and less monetary, exchange rate and fiscal flexibility have less capacity to monetise fiscal deficits without running the risk of higher inflation. This may trigger large capital outflows, devaluing the currency and prompting domestic interest rates to rise, as seen in Argentina over parts of the past decade.
While the reaction of the market to this approach by developing countries has been muted so far, the report argued, this situation might change. Developing countries who do this could “weaken monetary flexibility and economic stability, which could increase the likelihood of sovereign rating downgrades”.
In July, following the participation of Ethiopia, Pakistan, Cameroon, Senegal and the Ivory Coast in a World Bank-endorsed G20 debt suspension initiative, the rating agency Moody’s took action against those countries arguing that participation in this scheme increased the risk for investors in bonds issued by these countries, leading to some developing economies avoiding the initiative in order not to send a “negative signal to the market”. Zambia is on the verge of being the first “COVID default” and other developing countries could face a similar situation in coming months.
As a result of these dynamics, many developing countries are facing the tough choice of giving up any economically costly health measures or facing serious fiscal and economic crises. Access to credit has become a defining factor in the ability of governments to respond to the pandemic. As a result of access to cheap credit, developed economies are so far able to take such health measures while limiting the social and economic impact of the pandemic. Many developing countries do not have this luxury. Not everyone gets to shake the branches of the magical money tree.
Dubai economy to contract by 11% this year: S&P as the international lockdown impacted international travel to and stay in the previously popular spots of the world. Dubai, for its particular regional specifics and as the most popular venue in the Gulf region, seems to endure the most critically the pandemic or all the safeguards against it.
As per S&P estimate, Dubai’s gross general government debt will reach about 77% of GDP in 2020.
Low oil prices have had broad effects on GCC economies, of which Dubai is one, but hydrocarbons directly contribute only about 1% to Dubai’s total GDP.
The indirect effect of weaker demand from Dubai’s neighbours will dampen Dubai’s trade, tourism, and real estate markets, it stated.
Although Dubai’s economy is somewhat more diversified than that of most its regional peers, the report anticipates an economic contraction of around 11% of GDP in 2020, recovering to 2019 levels by 2023.
STR Global, a data intelligence and benchmarking firm, reported Dubai’s hotel occupancy rate at 26% in June as inbound tourism sharply declined following global lockdowns and much-reduced air travel designed to curb the spread of Covid-19.
The fact that fewer residents left Dubai during the hot summer months and instead spent more domestically to some extent has supported the economy. Local support for the economy cannot, however, offset the almost complete shutdown of inbound international tourism for most of 2020, and the likely slow recovery of the long-haul aviation that Dubai specializes in.
The Dubai government now expects to post a deficit of AED12 billion (3.2% of GDP) this year, largely owing to the reduction in economic activity and the consequent expected 28% decline in revenue, stated S&P Global Ratings.
It also expects significant off-balance-sheet expenditure, resulting in the government’s net debt position worsening by more than what the headline deficit would imply, as has occurred in previous years.
S&P Global Ratings pointed out that the below-the-line expenditure which causes the variance between headline deficits and the change in net debt mostly involves support for Dubai’s government-related entities (GREs), an example of which is the recently disclosed AED7.3 billion (1.9% of GDP) already provided to national carrier Emirates in 2020.
Support for GREs will likely be appreciably larger in 2020 than in the past, due to the broad cross-sector shock to Dubai’s economy, it added.
The ratings major said that in total, it expected new government bond issuance and loans to total around 7% of GDP in 2020. The government has issued AED8.4 billion (2.2% of GDP) of public debt so far in 2020, marking the biggest year for Dubai’s debt issuance since 2009.
“This, in combination with recently disclosed new bilateral and syndicated facilities through June 2020 (facilities that have increased by AED15 billion (4% of GDP) since Dubai’s previous end-2018 disclosures) supports our estimation that 2020 will be another year where debt accumulation far exceeds the headline deficit,” it stated in the review.
Is enough being done to shape the public realm in Saudi Giga urban projects? asks Hadi Khatib. His findings are as published in AMEinfo of September 25, 2020.
When it comes to building cities, developers need to understand target customers to uncover their needs and priorities and allow them to share feedback and make sure that what’s being built actually works for them
– Technology like augmented reality (AR) and virtual reality (VR) help achieve placemaking – Three Saudi Kingdom Cities will be part of the world’s top 100 Global Cities – Cities are facing difficulties where there is surging demand on infrastructure, services, mobility and housing
There are key experience considerations when planning master developments, giga projects, and cities.
Kristine Pitts, Director of ExperienceLab Middle East says “In a country that is rapidly changing and developing like Saudi Arabia, and with increasing competition for people’s attention, in-depth understanding of target audiences and actively designing with and for them will be key to attracting them to live, work and play. Build it and they will come is a risky strategy.”
Cities from scratch
KSA’s giga projects such as NEOM are cities from scratch where new residents, office workers, and visitors need to collectively create new communities within the newly built structure.
In Qiddiya, Saudi is creating spaces for Saudis seeking a different kind of lifestyle, and for expats seeking something that feels familiar compared to what they are used to. But what draws them? What are the deciding factors that make them choose to live, set up their workplace, or spend their Friday afternoons?
ExperienceLab encourages bringing the residents, visitors, and office workers into the design process to collaboratively define and shape patterns of use, paying particular attention to the physical, cultural, and social identities that define a place and support its ongoing evolution.
Physical spaces are defined by their physical edges, but places are defined by the people, activities, and engagements within them.
‘Placemaking’ refers to a collaborative process by which to shape the public realm in order to maximize shared value. The concept facilitates creative patterns of use, paying particular attention to the physical, cultural, and social identities that define a place and support its ongoing evolution with the intention of creating public spaces that promote people’s health, happiness, and well-being.
Technology, like augmented reality (AR) and virtual reality (VR), helps achieve this when showcasing designs before plans are finalized.
The best places are those that have adapted to change, and not being constrained or limited by short-sighted planning, architecture, or engineering.
Obvious factors to look at are green spaces, experiences, and what drives authentic community relationships.
Office workers need more than office space; they need the urban realm, a place to take time out, eat, and socialize.
People also need a way to get there! Where they live is a factor of their proximity to work, schools, and healthcare needs.
Also, technology underpins great cities, whether that’s accommodating autonomous transport, smart buildings, or adapting our spaces for the use of mobile technology.
The Global Future Cities Index measures a total of 21 metrics against 24 participating Global Cities – a total of 504 data points.
Three Saudi Kingdom Cities will be part of the world’s top 100 Global Cities: The Red Sea, NEOM, and Qiddiya.
Aecom and NEOM
America’s largest design engineering firm, Aecom, has been appointed to handle the design and support of the “backbone infrastructure” for NEOM, a futuristic, intelligent, and sustainable urban living and development set to deliver some of the highest quality living standards that the world has ever seen.
The need for a public realm
According to UN-Habitat, public spaces now comprise just 2% of the area of Middle Eastern cities, compared with 12% in the average European city. Often, the requirement for new infrastructure comes at the expense of green spaces. For example, in Riyadh, the land devoted to parks, squares, and other public spaces per person has fallen by 80% in half a century.
A recent massive survey showed many participants having a negative view of public space quality both within their neighborhoods and citywide.
When asked how far public spaces attract people, respondents thought they did not. Most residents say increased distances between buildings discourage people from exploring outdoor areas with wider streets and widely dispersed spaces.
Regarding the design and construction of public spaces within modern neighborhoods, most pointed at the lack of such spaces and pedestrian networks. The rigid edges and poor finishes of public spaces negatively affected visual character, creating unpleasant urban images, some respondents said. Also, the lack of shaded areas and climate protection discouraged the public from outdoor areas.
The New Jeddah waterfront was described as suffering from traffic congestion, crowds, litter, the careless attitudes of visitors, and a lack of well-maintained public toilets.
Jeddah has a shortage of affordable housing which means that more than one million people, a third of the population, live in unplanned settlements.
The common tales of cities facing difficulties include surging demand on infrastructure and services, mobility constraints, housing backlogs, limited access to clean water, rising pollution levels, lack of waste management and environmental sustainability, among others.
Saudi has witnessed a steep rise in urban population (over 83% of the population now lives in urban areas) and infrastructure demand resulted from tremendous economic growth.
Massive investments worth over $810 billion in mega tourism projects across Saudi Arabia is expected to transform the kingdom into one of the largest leisure tourism sectors in the world between now and 2030, according to a research conducted by the Middle East and North Africa Leisure Attractions Council (Menalac), the leisure and entertainment industry council representing the Middle East’s dynamic leisure attractions sector. Here is Trade Arabia‘s from Riyadh.
Saudi to be among world’s big leisure tourism hubs by 2030
These include the $500 billion mega development Neom which leads the list of the mega projects followed by the $10 billion Qiddiyah Project, spread across 334 sq km in Riyadh.
The third project is Amaala, or the Saudi Riviera, located in the northern region with an area of 3,800 sq km, and developing islands in the Red Sea with a total area of 34,000 sq km.
Once completed, it will deliver a futuristic mega sustainable city.
According to the report, Saudi Arabia is looking to more than double its investment in recreation from the current 2.9% to 6% by 2030.
Mishal Al Hokair, Board Member of Menalac, said: “Saudi Arabia has an array of dynamic plans and attractions planned over the next few years, each of which will add to the fast growing Leisure and Entertainment sector.”
“Its Vision 2030 will change the entire economic and tourism landscape of not only Saudi Arabia, but the entire Middle East region, that will have a massive positive knock-on effect on the leisure tourism industry,” noted Al Hokair.
“Once the current Covid-19 situation improves, the investment and development in the Saudi Arabia’s tourism sector will bring massive opportunities for the industry. It is time for everyone to prepare for the next big growth,” he added.
Saudi Commission for Tourism and National Heritage (SCTH), the country’s tourism regulator, said the mega tourism projects being developed by Public Investment Fund will be spread over an area of more than 64,634 sq km, with a value exceeding $810 billion.
In addition, SCTH will be developing museums in various Saudi regions, and preserving Saudi heritage with a cost of more than $1.3 billion.
Saudi Arabia foresees that the national tourism will significantly contribute to the gross domestic product as the most growing non-oil economic sector. The tourism revenues increased to more than SR193 billion ($51 billion) in 2017, and to more than SR211 billion ($56 billion) in 2018, SCTH said in a report.
In 2017, the kingdom’s tourism sector had attracted $28.6 billion, more than six times the world average in tourism capital investment, it added.
Despite the current situation with regards to Covid-19, Saudi Arabia is pushing ahead with construction of some of these massive projects. A number of construction contracts have recently been awarded following the partial re-opening of the economy after the lockdown.
Red Sea Development Company has recently awarded construction contracts worth $1 billion while Neom has awarded Bechtel and Aecom programme management contract.
Changes and growth in Saudi tourism landscape will help leisure attractions operators in the Middle East and North African (Mena) countries. The recent reopening of the land borders by Saudi Authorities will help boost regional tourism in the GCC region.
SCTH plans to facilitate investment SR171.05 billion that will boost the tourism industry capacity and the number of hotel rooms to 621,600 rooms and boost the tourism sector’s contribution to the GDP by 3.1 per cent, and increase direct employment to 1.2 million jobs.
Prakash Vivekanand, the board member of Menalac, said: “The latest news from Saudi Arabia is very encouraging. The government wants to push ahead with the mega projects that will not only boost the country’s gross domestic product (GDP) but also the tourism sector.”
It will create massive opportunities for all the players in the leisure attractions business and we could count on an exciting future for the industry in the Mena region.”
According to Saudi Arabia’s General Investment Authority (Sagia), the country wants to increase investment in recreational facilities to 6 per cent from the current 2.9 per cent per annum – more than double the current level, as part of Saudi Vision 2030.
“In 2017, the Saudi tourism sector had attracted investment of SR172 billion ($28.6 billion), which was six times the world average in tourism capital investments,” according to a report by Sagia. “Investments are expected to rise 5.5 per cent per annum over the next ten years to SR200 billion ($54 billion) per annum.”
Rosa Tahmaseb, Secretary General of Menalac, said: “The leisure attractions industry in the Mena region is upbeat with the new opportunities that are arising in Saudi Arabia.”
“We see massive opportunities for our industry being created by more than a $1 trillion investment in the Saudi economy between now and 2030,” she noted.
Tahmaseb called upon all leisure industry stakeholders, both suppliers and operators to explore these opportunities and ascertain how they can take a leading role in helping Saudi Arabia develop its leisure facilities in the coming decade.
According to her, tourism and entertainment are an essential part of the Saudi Vision 2030 which is aimed at diversifying the Saudi economy by reducing its dependence on oil.
Saudi Arabia aims to develop versatile tourism destinations, which include several coastal sites, marvellous islands and distinguished heritage areas, all of which will require a high level of expertise, support and the most innovative attractions, technology and experiences to ensure the kingdom becomes one of the top tourist and entertainment destinations in the Middle East within the next few years.
“Despite the short-term setback created by the Covid-19 pandemic, the long-term prospects for our industry remain bright. One example of this can be seen in the dynamic projects planned for Saudi Arabia,” she added.-TradeArabia News Service
The virus has upended plans for a flurry of climate diplomacy this year. Kelly MacNamara reported the UN chief as saying: Cooperate on climate or ‘we will be doomed’.
World powers must pull together and retool their economies for a green future or humanity is “doomed”, UN chief Antonio Guterres has warned, telling AFP that failure to control the coronavirus pandemic illustrates the danger of disunity.
Before the virus struck, 2020 was billed as a pivotal year for the plan to dodge the bullet of catastrophic global warming, with high profile summits planned to catch a wave of public alarm over the future of the planet.
The coronavirus crisis may have shunted climate into the sidelines as nations launched unprecedented shutdowns to try to slow its spread, but Guterres said the need for climate action was more urgent than ever.
In a searing assessment of the international response, Guterres said the pandemic should sharpen governments’ focus on cutting emissions, urging them to use the crisis as a springboard to launch “transformational” policies aimed at weaning societies off fossil fuels.
“I think the failure that was shown in the capacity to contain the spread of the virus—by the fact that there was not enough international coordination in the way the virus was fought—that failure must make countries understand that they need to change course,” he told AFP.
“They need to act together in relation to the climate threat that is a much bigger threat than the threat of the pandemic in itself—it’s an existential threat for our planet and for our lives.”
The UN chief said “pollution and not people” should be taxed and called for nations to end fossil fuel subsidies, launch massive investments in renewables and commit to “carbon neutrality”—net zero emissions—by 2050.
“We need to have a number of transformational measures in relation to energy, in relation to transportation, in relation to agriculture, in relation to industry, in relation to our own way of life, without which we would be doomed,” he said.
His comments come as the landmark Paris climate deal goes into effect this year in a bid to cap the rise in temperature to “well below” two degrees Celsius (3.6 Fahrenheit) above pre-industrial levels.
The accord was already on a knife-edge before the pandemic, with doubts over commitments from major polluting nations and concerns that it is still far short of what science says is needed to avert disastrous climate change.
US President Donald Trump shocked the world in 2017 when he said the United States—history’s largest emitter—was withdrawing from the Paris deal. It is due to leave on November 4, just after the country’s presidential election.
The pandemic has further dented hopes that diplomatic pressure could sweep foot-dragging nations into announcing bold climate action plans, as major summits were postponed and nations focused inwards.
Guterres said there was currently no clear sign that a United States government recovery policy would align with Paris goals, but he expressed hope that states, businesses and individuals “will compensate for the lack of political commitment that exists at the present moment“.
He said much now rests on the actions of major emitters, China, the US, Europe, Russia, India and Japan, in interviews with AFP and other members of Covering Climate Now, a global collaboration of news outlets committed to increased climate coverage.
“We have never been as fragile as we are, we never needed as much humility, unity and solidarity as now,” he said, blasting “irrational demonstrations of xenophobia” and the rise of nationalism.
“Either we are united, or we will be doomed,” he added, ahead of a largely virtual UN General Assembly this month.
Climate change warnings are no longer predictions of a distant future.
Earth’s average surface temperature has gone up by one degree Celsius since the 19th century, enough to increase the intensity of droughts, heat waves and tropical cyclones.
Burning fossil fuels has been by far the main driver of rising temperatures, with concentrations of CO2 in the atmosphere now at their highest levels in around three million years.
The last five years were the five hottest on record, while ice sheets are melting at a rate that tracks scientists’ worst-case scenarios, prefiguring devastating sea level rises.
“The expectations that we have in relation to the next five years about storms, about drought and about other dramatic impacts in the living conditions of many people around the world are absolutely terrible,” Guterres said, ahead of a multi-agency climate report on Wednesday.
The United Nations says it is still possible to reach a safer goal of a 1.5C cap in temperature rise, but to get there global emissions must fall 7.6 percent annually this decade.
While the shutdowns implemented during the pandemic could reduce global emissions by up to eight percent in 2020, scientists have warned that without systemic change in how the world powers and feeds itself, the drop would be essentially meaningless.
‘A different world’
There are also concerns that massive Covid-19 stimulus packages being devised by governments could provide a crutch to polluting industries.
Guterres has urged Japan, India and China to drop their continued reliance on coal.
China—the world’s biggest polluter—has invested heavily in renewable energy, but it has also reportedly stepped up coal production.
The UN head said he was hopeful the EU would make good on its green commitments, after it announced its 750-billion-euro ($885 billion) stimulus plan that aims in part to reach carbon neutrality targets.
He said the pandemic had demonstrated society’s capacity to adapt to transformation.
“I don’t want to go back to a world where biodiversity is being put into question, to a world where fossil fuels receive more subsidies than renewables, or to a world in which we see inequalities making societies with less and less cohesion and creating instability, creating anger, creating frustration,” he added.
“I think we need to have a different world, a different normal and we have an opportunity to do so.”
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