Last update on: Tue Sep 26, 2023 11:42 PM
The global financial system is in a real bind, because interest rates may be peaking, global debts are at record highs, and geopolitical and climate disaster risks are looming.
The United Nations have been complaining that the funding gap for meeting their 2030 Sustainable Development Goals (SDG) is around US$4 trillion per year, or roughly around 4 percent of world GDP. In their August 2023 study on lifting economies out of poverty and dealing with net zero transformation, McKinsey Global Institute estimated that to empower the underprivileged out of poverty and tackle net zero, the world would need investment to the order of 8 percent of global GDP annually.
Bluntly speaking, the West is no longer thinking for the rest of the world.
Although these numbers look horrendously high, McKinsey’s own estimates of the global balance sheet showed that funding for change is possible, provided the political will is there. Between 2000 to 2021, “the global balance sheet grew 1.3 times faster than GDP. It quadrupled to reach $1.6 quintillion in assets, consisting of $610 trillion in real assets, $520 trillion in financial assets outside the financial sector, and $500 trillion within the financial sector.”
The global financial system with roughly $500 billion assets ($486.6 billion according to Financial Stability Board estimates) should not find funding of $4 to 8 trillion or 0.8-1.6 percent growth annually impossible to achieve. The banks alone have $183 trillion in assets, the non-bank financial intermediaries $239 trillion, whilst central banks have $44 trillion.
One reason why the global financial system is reluctant to really fund SDG goals is that the advanced rich countries are taking a lot of the global savings. The United States alone has a net international investment deficit of $16.1 trillion at the end of 2022, equivalent to 15.5 percent of world GDP. Due to these large US fiscal deficits, the Congressional Budget Office (CBO) estimated that the US federal budget deficit would fall from 12.4 percent of GDP in 2021 to 3.7 percent of GDP by 2023. Due to higher interest rates and expenditure, the CBO estimated that the deficit would rise to 6.1 percent of GDP by 2032 — significantly larger than the 3.5 percent of GDP average deficits over the past 50 years.
In short, if the rich countries do not devote funding towards SDG for the world as a whole, and instead spend on domestic defence and consumption, the world is doomed to have a burning planet and social disorder.
Within Asia, the richer and aging North East Asia (Japan, South Korea, China, Taiwan, Hong Kong SAR) are huge net savers, with net investment surpluses (including Singapore), amounting to $10.4 trillion. A large part of the savings have been invested in US and European financial assets or foreign direct investments, with a considerable share intermediated by the international financial centres of Hong Kong and Singapore. The financial centres in the Gulf may emerge to be important funders of the needs of Central Asia, Middle East, Africa and South Asia.
The future growth zone in the world will be Southeast Asia and India, which have over 2 billion people, with a younger population, requiring huge funding for poverty eradication, infrastructure needs and NetZero investments. At the end of 2022, Hong Kong has gross international assets of HK$47.5 trillion (US$6.1 trillion) and a net position of US$1.76 trillion.
Singapore, on the other hand, had gross international assets of S$7.1 trillion (US$5.2 trillion) at the end of 2022, and a net investment position of S$1.1 trillion (US$813 billion). Since both financial centres intermediate global flows, the real issue is whether they have the right set of financial institutions to intermediate the supply and demand for funding of the structural transformation of the global South.
In global terms, the multilateral development banks (such as the World Bank etc) are too small to make a big dent. Their total annual lending is around $130 billion and their balance sheet total is still too small because they are constrained by the unwillingness of their majority shareholders to increase their capital. Official Development Assistance (ODA) aid to developing countries in 2021 was only 0.33 percent of the developing country donor GDP, whereas the target was 0.7 percent of GDP. Many rich countries have cut back on ODA due to their own fiscal difficulties.
Although Hong Kong and Singapore have very large banking systems, the Basel Rules on capital, liquidity and total leverage caps have on the whole made banks much more cautious in taking risks to finance long-term infrastructure and SDG projects.
The only possible institutions that may be willing to take more risks are insurance companies, pension and provident funds and sovereign wealth funds. Insurance companies remain cautious due to growing natural disaster risks, whilst long-term pension funds have kept their asset allocation to advanced countries. Sovereign wealth funds have grown in size to over $10 trillion in global assets, but they are only recently more willing to take higher risks in alternative assets.
All in all, if New York, London, Frankfurt and Tokyo are willing to fund mostly advanced country needs, will Hong Kong and Singapore be prepared to take higher intermediation risks of the global South?
It is difficult to say, “let the market decide,” because free market flows are now complicated by geopolitically driven sanctions, central bank interventions, as governments become more protectionist and interventionist. Given excessive and growing debt burden, the only funding which can absorb higher risks is equity funding. But currently, such funding is chasing tech IPOs which are also increasingly geopolitically charged.
It is too glib to conclude that climate change and SDG funding will not be met by the current international financial system. When, not if, climate disasters and social disorders erupt, financial systems cannot escape losses, nor responsibility for being unwilling to take the risks of meeting the needs of the real economy. If the real economy fails, so will the financial systems, central banks notwithstanding.
Bluntly speaking, the West is no longer thinking for the rest of the world. They have enough of their own problems in beating back the challenge from rising powers. The South’s future will be shaped not just by alternative visions of disparate and diverse views, but also how their financial institutions respond and adapt to new geopolitical realities.
Andrew Sheng is a distinguished fellow of Asia Global Institute, University of Hong Kong, and chief adviser to the China Banking Regulatory Commission.
Views in this article are the author’s own.
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