Why global debt and supply chain risks are likely to linger

 

Many companies rely on financial leverage to meet operational needs in an inflationary and inconstant era. This demand and dependence on debt will continue, a new report says. Capital pressures from supply chain risks also continue to burden organisations, and many businesses will need to invest in technology to stay efficient, the report says.

The report, Look Forward: A World in Disruption, from ratings firm S&P Global looks at emerging themes that could influence the global economic outlook for several years to come. “The disruptions at play are reshaping the global economy, capital markets, and geopolitical order for the long term. Both challenges and opportunities will emerge from this period of profound transformation,” the report said.

The world is in “more debt than ever before,” according to the report. Global governments, households, and financial and nonfinancial corporates owed $300 trillion in June 2022, as estimated by the Institute of International Finance, the report said. “[This] works out to $37,500 of debt for every person in the world, compared to a GDP per capita of just $12,000.”

Due to debt burdens, market liquidity could be lessened as credit becomes more difficult to secure —central banks are raising policy rates, and investors are demanding higher yields in response to inflation, the report said. The economy could also become strained further if global borrowers freely take on more less-productive debt, which the report calls the most pessimistic scenario.

There are no easy solutions; governments and regulators must collectively decide to manage their economy’s leverage down, with a goal to return to pre-pandemic levels by 2030. But this is an optimistic scenario, the report said, and it does not imply that no new debt is formed, but rather that productive new debt replaces unproductive old debt.

“An alternate source of funding for business is … equity,” the report said. “The low-interest-rate environment had encouraged many companies to lever up rather than raise equity. … The current higher cost of funds environment could trigger a debt-equity rebalance.”

Supply chains also are likely to reshape the global economy, the report said. As supply chains face heightened geopolitical risks, transport and logistic risks, and changing consumer preferences, many corporations will need to invest in technology to improve productivity, the report said.

“This elevated supply chain risk is coming from multiple directions. China’s path forward on its COVID policy is not yet clear, which will continue to pose the risk of future lockdowns and manufacturing disruptions,” the report said. “Geopolitical risk, rarely part of the supply chain calculus, must be factored in following Russia’s invasion of Ukraine and rising tensions over Taiwan.”

Managing long-haul, transcontinental supply chains means a greater risk of delay and less predictability in end-to-end ocean transport transit times, the report said. Due to increased uncertainty, corporations can end up with higher inventory levels and more use of air freight, which greatly exceeds ocean shipment costs, the report said.

The report recommends that companies invest in technology to minimise the impact of a painful and costly transition in the future. New technologies such as 5G, edge computing, artificial intelligence, blockchain, and machine learning will improve decision-making and the predictability of supply chains in the future, the report said.

Other key takeaways from the report:

Clean energy resources could take global focus: “As the demand for oil defined geopolitics in the 20th century, the scramble to secure minerals critical for the energy transition is likely to shape geopolitics in the 21st century.”

A commodity super-cycle is in reach: “A more aggressive commitment to the energy transition across G20 nations could create the conditions for a sustained surge in demand, supply, and prices.”

More women in CEO roles could accelerate diversity: “For the past two years, women CEOs have exhibited a more positive communication style and embraced a large range of stakeholders, an approach that could help companies attract diverse talent and prosper.”

The adaptation finance gap should narrow: “The pace of change over the coming years will likely accelerate, driven by the realisation and inevitability of climate impacts, as well as the market-based incentives starting to emerge.”

Electric vehicles could transform the automotive market. “The [electric vehicle] battery will be the defining technological and supply chain battleground for the automotive industry in the coming decades, and access to its constituent raw materials will be critical.”

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