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The International Monetary Fund (IMF) released two updates in the month of June – first was the World Economic Outlook, titled A Crisis Like No Other, An Uncertain Recovery and another was the Financial Stability Report.
These reports and updates are some of the most watched reports by economists, policymakers and businesses. The earlier Economic Outlook in April, 2020 had predicted a growth in India by 1.9% and a sharp rise back to 7.4% in 2021. It seems that IMF again missed their economic forecast and this time by leaps as it revises their predictions yet again.
One is reminded of the Economic crisis of 2018 when IMF financial surveillance could not predict any significant risks to the global economy in their Economic Outlook reports. IMFs own working paper based on GDP forecasts of over 63 countries for the year 1992 to 2014 finds that the ability to predict turning points are limited and they miss the magnitude of recession by a wide margin until the year is almost over.
Likewise, a Bloomberg analysis of more than 3200 same-year country forecasts, published each spring since 1999 found its forecasts underestimated GDP growth by 56% of cases and overestimated it in 44%. Noted Indian economist and former member of the Economic Advisory Council to the Prime Minister (EAC-PM), Mr Rathin Roy had earlier commented on IMF projections as usually 80% wrong.
What is important to note is that IMF not only forecasts but also provides billions in bailout loans in exchange for implementation of strict austerity measures and other neo-liberal policies imposed in the country that are opposed by workers, civil society and citizens.
WORLD ECONOMIC OUTLOOK
IMF in the World Economic Outlook forecast has reversed their earlier observations and is now projecting a deeper recession in 2020 and a slow recovery in 2021, different from predicted few months back. Global output is projected to decline by 4.9 % in 2020. It also has estimated that the total output loss to the economy in 2020 and 2021 will be over $12 trillion.
India’s forecast has been cut by a sharp 6.4% to -4.5% for 2020. In the last forecast, IMF had predicted Indian economy will grow by 1.9% but it was revised to -4.5% in the update. This according to Gita Gopinath, chief economist IMF, is due to longer duration of the lockdown than it was assumed and rise in Covid cases in India.
Synchronized deep downturn
The update projects a synchronized deep downturn in 2020 for both advanced economies (-8%) and emerging markets and developing economies (-3% to -5%, if excluding China), and over 95% of countries are projected to have negative per capita income growth in 2020. The report mentions among other things the severe hit to labour market. It quotes ILO on the global decline in work hours which in the first quarter of 2020 was equivalent to 130 million full time jobs and predicts loss of 300 million full time jobs in the next quarter.
It estimates India’s liquidity support announced in different packages as of 4.5% of GDP in the form of loans and guarantees for businesses and farmers, and equity injections into financial institutions and the electricity sector.
Mounting Debts and deficits
Public debt is projected to reach the highest level in recorded history this year, in relation to GDP, in both advanced and emerging markets as well as developing economies. This is predicted due to steep contraction in output, fall in revenues and high fiscal support costs. The global public debt is expected to reach an all-time high, exceeding 101%of GDP in 2020–21—a surge of 19 percentage points from a year ago. India’s Gross Debt is projected to increase to 84 % in 2020 compared to 72.2% in 2019.
GLOBAL FINANCIAL STABILITY REPORT UPDATE
IMF also came up with an update for its Global Stability Report. The report captures an overall easing of financial conditions as there is a surge in risk appetite in financial markets and equity markets rallying back. This according to the report is due to the swift and bold actions by central banks and have boosted market sentiments. However this has created a disconnect between the real economy and financial markets. The Economic Outlook has predicted a further reduction in global output, loss of working days, reduction in revenue etc.
The pandemic has exposed the financial vulnerabilities including corporate and household debt which could become unmanageable given the continued economic lockdown during the pandemic.
Historically, globally debt has reached $55 trillion in 2018, described as the largest, broadest and fastest of all the debt so far. Aggregate corporate debt and household debt has increased in many economies and some of which will face an extremely sharp decline. This has led to broader impact on the solvency of companies and household.
The report has warned that rising debt levels and potential credit losses resulting from insolvencies could test resilience of the banking sector. Banks have to provision more for expected loses as they assess the ability of the borrowers to repay their loans. The Non-Banking Financial Companies (NBFCs) which now have a greater role in the financial system are vulnerable to pro cyclical corrections and the behavior of NBFC during a deep downturn is untested.
In India, the increase in the stress of the banks is a pre-existing condition according to the Financial Stability Report of RBI published in December 2019. The Gross Non Performing Assent ratio of banks was estimated to increase from 9.3% in Sept 2019 to 9.9% in September 2020. The report also said state-run banks’ GNPA ratios may increase to 13.2% by September 2020 from 12.7% in September 2019. However as per the RBI Governor, the economic impact of the corona virus pandemic may lead to higher non-performing assets and capital erosion of banks.
Rating agency CRISIL in its report on Covid-19 impact has said that gross non-performing assets (NPAs) of lending institutions are set to rise 150-200 basis-points (bps) this fiscal due to higher slippage and lower recovery. This according to Fitch Ratings can be anywhere between 200 and 600 basis points (bps). Considering the Covid-19 impact, CRISIL has projected GNPAs in the range of 11-11.5% for the financial year 2021.
According to RBI itself, there is a need for re-capitalisation plan of public sector banks as the minimum capital requirements of banks will not be enough to absorb the loses.