nCa Analysis
There is the impending avalanche of the corporate debt maturities in the USA. It will create a mix of challenges and opportunities for Central Asia.
First, let us look at the issue of the corporate debt maturities in the USA.
Goldman Sachs predicts that corporate debt maturities will be US$230 billion for the rest of 2023, US$790 billion in 2024, and US$1.07 trillion in 2025, representing a combined 16% of all corporate debt. A further US$4+ trillion in corporate debt is set to mature from 2026 through 2030, according to Goldman.
From now until the end of 2030, there would be a total of nearly US$6 trillion in corporate debt maturities.
The debt owners will either have to resort to short-term, expensive loans or face the risk of going under.
The US interest rates are now at 5.25-5.50%, and potentially set to go higher still as the Federal Reserve continues to combat inflation, refinancing risks will grow more pronounced, especially over the next two years.
This will affect the job market. — Goldman Sachs warns that the refinancing of US corporate debt will lead to a reduction in capital expenditures and the loss of about 5,000 jobs per month in 2024. That figure could double in 2025 to 10,000 jobs per month, should interest rates remain elevated at their current level.
Jan Hatzius, the Goldman Sachs’ chief economist told the Wall Street Journal, “We find that for each additional dollar of interest expense, firms lower their capital expenditures by 10 cents and labour costs by 20 cents.”
High corporate indebtedness implies higher interest expenses and thus less money available for investment. Firms with high debt also find it harder to obtain new funds from external sources due to their higher default risk.
This has been the source of some concern since excessive debt can lead companies to face financial distress, and this distress could spread to the larger economy. People are especially sensitive to this because of the role debt played in past crises, such as the financial crisis that peaked in the autumn of 2008.
The total corporate debt was almost US$19.6 trillion in the first quarter of 2018. It rose to approximately US$23.9 trillion by the second quarter of 2022. Of this, US$16.3 trillion was the debt issued by the financial corporations.
The debt limit is the maximum of debt the economy can bear without collapsing. For the USA, this is $31.4 trillion i.e. the debt limit caps the total amount of allowable outstanding U.S. federal debt. The U.S. hit that limit—$31.4 trillion—on January 19, 2023, but the Department of the Treasury has been undertaking a set of “extraordinary measures” so that the debt limit does not yet bind.
The United States’ debt-to-GDP ratio at the close of fiscal year 2022 was 97 percent. While this figure is down slightly from 100 percent in 2020, a 74-year high, the nation’s fiscal outlook is still on an unsustainable path. Debt held by the public is on track to exceed GDP in 2024 and climb to 119 percent in 2033.
In the parlance of football, both the corporate debt and the public debt of the USA are in the Red Zone.
We are sure that the competent teams in the public and private sectors will find a solution before the whole thing starts snowballing.
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At least for the next couple of years, the USA may not be an attractive destination for the investors except in some select areas.
Since the nature abhors vacuum, the investors would look at the investment opportunities elsewhere.
Central Asia can burnish its credentials as a desirable region for the investors.
For this, the main thing would be to streamline the taxation ecosystem across the region – investors should have the option to split their facilities transversely in a number of countries in the region.
There would also be the need to enhance the friendly atmosphere for the investors. — This would include the preferential visa regime for investors, the freedom to hire the professionals from wherever they can be found, the availability of housing on rent or lease without much hassle, the protection against any kind of interference as long as they abide by the rules and the law, etc.
The prolonged job cuts that are connected with the rising wall of the corporate debt maturities would possibly lead to less money in circulation. When there is less money in circulation it can have several effects including disinflation (reduced inflation) or deflation (falling prices). — More products and services can be available at lesser prices.
This will temporarily diminish the prospects of exporting goods and products from Central Asia to the USA. For the time being, Central Asia would need to explore other markets for anything it has to export.
An important lesson for Central Asia is that the current economic model of the USA is not entirely suitable for a copy-paste experiment in this region. It would be advisable to continue with the mixed-economy model, introducing refinements where and when necessary. /// nCa, 10 August 2023
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