The COVID 19 outbreak has exposed fundamental weaknesses in the structure of the global economy that serve to amplify the damage caused by the pandemic. To peer into the abyss, just take a look at the fiscal and monetary situations in the United States. Prior to the onset of the coronavirus crisis, the United States federal government was already expected to run a trillion-dollar deficit in the current fiscal year. Right now, that same government is planning to layer on top of that pre-existing deficit fiscal stimulus of around $2 trillion, with even more debt to be added behind that. This means the United States budget deficit is likely to hit $3 trillion this year.
But that number doesn’t even take into account the loss of tax revenues that are due to the decline in business activity and employment. In the 2008 recession, federal tax revenues declined by over $400 billion. That number is likely to be greater this time around. Nor does it take into account higher levels of spending on social welfare programs that are part of existing programs and do not require special “stimulus” funding to be appropriated. They go up automatically.
Richard Phillips, a New York-based international analyst stated that it is therefore safe to assume that the federal budget deficit in the current fiscal year will zoom past the $4 trillion mark and approach $5 trillion before it’s all over. This makes the $1 trillion deficit of 2009 look quaint by comparison. The United States GDP in fiscal 2019 had been expected to come in at $21.4 trillion. Assuming there is a 15% decline in fiscal 2020 due to the pandemic, GDP looks like it will come in at around $18 trillion. That would put the projected United States budget deficit at around 28% of GDP!
Many economists would consider that number unsustainable on its face. But the situation is even worse than what economic theory might suggest. The fact is that there are precious few options for funding the government deficit. With interest rates about to go negative, for example, how is the federal government going to induce United States investors to pour money into financing a $5 trillion deficit?
To make matters worse, the biggest foreign investors in United States treasuries are hitting economic walls of their very own. Specifically, the Chinese economy is suffering because of a lack of foreign demand and the Gulf States are hurting because of the collapse in oil prices. China and Saudi Arabia are indispensable links in the recycling of global capital and a breakdown in that flow of funds augurs a fundamental repositioning of the United States dollar on the world market.
According to Richard Phillips, the only remaining alternative to dealing with United States budget deficits will be to continue Fed policy prescriptions enacted following the financial crisis of 2008 and intensified during the current crisis. That would translate into a potentially massive expansion of the Fed balance sheet as it stands up as “purchaser of last resort” for Treasuries, a process which has already begun.
Funding United States fiscal deficits is a problem of one sort. Some of the more secular problems embedded in the global economy are of a different sort. For example, there have been indications of a looming corporate debt crisis in the United States for some time. Corporate debt today stands at over $10 trillion – an historically high number that is equal to more than 50% of the United States economy. To make matters even worse, much of this debt has been issued by non-investment grade rated companies and are considered junk.
Holger Schmieding, Chief economist at Berenberg Bank in London stressed that as these issuers come under cash flow pressure due to the pandemic, defaults are likely. And the blowback from this will hit the United States banking industry squarely in the face. It bears the additional burden of holding syndicated loans to these self-same borrowers. And to make matters worse, a large percentage of these corporate bonds are directly or indirectly related to the energy sector, which has problems of its own. Industry observers estimate excess capacity is around 20% of global production.
And then, there is China. It has been overleveraged for some time. The Chinese government has been sweeping its structural economic problems under the rug of obfuscation. But hiding the problems doesn’t make them go away. And what about the EU? The EU has embraced leverage through the European Central Bank (ECB), even though its member states, especially Germany, remain wary of leveraging their currency and economies in the first place. ECB President Christine Lagarde recently announced an 850-billion-euro facility to purchase EU government and corporate bonds. This underscores the scope of structural problems within the EU.
According to Holger Schmieding, against this backdrop, lawmakers in Washington seem determined to stave off recession. This in itself may be a mistake, because it doesn’t seem possible to hold back the economic tide, no matter what level of stimulus is applied. The first rule here should be to stabilize the patient before working on recovery. With so much of the United States (and Europe) in lockdown already and more to come in the weeks ahead, there is little scope to reverse a massive decline in GDP. Instead of trying to stop the decline, the important consideration should be to make the decline in GDP temporary. Shoveling money at the problem now may seem like a good idea. But when the pandemic is deemed under control, there will be precious little in the way of resources available to jump start a robust recovery.
Valbona Zeneli, Chair of the Strategic Initiatives Department at the George Marshall European Center for Security Studies argued that if the crisis ends with the United States of America fiscally and monetarily bankrupt, the idea of a full-blown depression becomes all too real. Given the way policymakers are behaving, the United States seems set on a course to be fiscally and monetarily bankrupt when the crisis ends. According to. Valbona Zeneli, the wiser solution now might be to judiciously provide limited financial support to the needy and encourage forbearance in both the public and private sectors for the next 60 days. In other words, put the economy on hold for 60 days and provide for the needy, while the medical issues are addressed and resolved.
There was a broad-based lack of confidence in the former Trump Administration’s ability to handle these unprecedented challenges. This lack of confidence was not only applies to the experts, i.e., economic policymakers and professional investors inside and outside the United States. Confidence is truly nonexistent among the more than 50% of Americans think President Trump was not fit for office. It was true that President Trump’s handling of the crisis has failed to build confidence in anyone other than his most ardent Fox News watching fans. President Trump was busy on a daily basis to gild the lily, misstate the facts and ad lib serious policy all along the way.
Now, it is President Joe Biden not Donald Trump who is in the White House. According to recent opinion polls, President Biden’s 100 days performance is commended by Americans. The crucial issue now is not only President Biden, but also policymakers need to take a sobering look at the state of the United States economy and then proceed cautiously in a sober-minded fashion. They need to keep in mind that this is not reality television!
The global economic affairs and the United States
Providing a new telecom service
Mohamed Shameel Aziz Joosub is a South African businessman and CEO of Vodacom, a South African mobile communications company since March 2013. Vodacom is part of the Global Partnership for Ethiopia that signs the telecom licensing agreement with Ethiopia.
Born in Laudium, Transvaal South Africa, Joosub has a Bachelor of Accounting Science degree from the University of South Africa, and a Master of Business Administration degree from the University of Southern Queensland. Before Joosub became CEO of Vodacom, he spent eighteen months as head of Vodafone España. Joosub is a board member of Vodacom and Safaricom, positions he has held since 2012 and 2017, respectively.
Joosub recently visited Ethiopia to attend the signing ceremony of one of the biggest deals is East Africa. The Global Partnership for Ethiopia signs the historical telecom licensing agreement with the government of Ethiopia last week to start its operation in Ethiopia. The consortium, Vodafone, Vodacom, Safaricom, Sumitomo Corporation, and the CDC Group, won one of the two telecom operator licenses bid by offering $850 million. The move will create jobs for 1.5 million citizens and activate over $8 billion in domestic investment. He talked to Capital about the consortium and what their future plan in the telecom sector in the coming years. Excerpts;
Capital: What is your feeling about the signing agreement?
Joosub: It is really a historical day for us, we have been pursuing license for more than 12 years looking forward to the day Ethiopia would open up. So for us it is a historical moment it is a very big market and it is a historical moment for Ethiopia as well, and we are quite excited about the opportunity to start our services in Ethiopia to the 110 million people.
Capital: Over the coming ten years you have planned to invest about eight billion dollars in Ethiopia; what kinds of investment is this?
Joosub: First our big investment obviously will be on network equipment. We have to work on the network, and it is really a sophisticated element from the base stations, to core network, to billing systems, the IT system that need to be implemented and the fiber cables. So there’s a lot of network infrastructure and IT systems and of course introducing our platforms into the market as well. As you know, M-Pesa or mobile money will be made available within a year. So the big part of it is rolling out and preparing for mobile money and being able to run mobile money platform. We have to go work on distribution and power and local distribution channels. So there is a lot of investment that is going to be required and we will also be investing into people and growing out their employment but also empowering a lot of small businesses to basically help with the delivery to provide a world-class network in Ethiopia.
Capital: During your operation your company is going to use government infrastructure, so how do you see that, how much profitable is it?
Joosub: So it will be simultaneous in terms of operation. We will be able to use some of Ethio Telecom’s infrastructure but we have got coverage obligation where we have to cover most part of the country within a limited time period, so we have to build quite rapidly to be able to meet those coverage obligations and of course we need the network to be able to carry our own traffic so the quicker you can roll out your own network it is very different and also important for us to be able to provide our own service to our customers.
Capital: What are the challenges you are expecting in the future? And what do you expect from the growing of technologies like over the top (OTTs) services that use the platform of internet providers to sell their products?
Joosub: I think the big part is there will always be OTTs and also we see an opportunity on the one side, there is a change of setting our revenues to the OTTs, but the other side is there are opportunities to work with the OTTs so we work a lot with the OTTs. They also want the coverage and so on, so I think it has opportunity to work with them and to find opportunities to work together.
Capital: How do you plan to overcome the foreign currency shortage in Ethiopia and how are you going to tackle the bureaucracy in different public and government sectors you are going to work with?
Joosub: I think on the foreign currency the plan has been laid out. We reviewed the plain; the government have put a credible plan on foreign currency. So we are quite encouraged with developments with the central bank and conducted very encouraging meetings that we had with the governor of the National Bank of Ethiopia and they promised to us that their doors are always open.
Since the government has publicly shared the plan on the foreign currency which we believe the first steps they are taking is a credible and of course we have also discussed with institutions like the World Bank, IFC and so on, and we are quite encourage with the plan.
Capital: Your 500 million dollar investment in Ethiopia is said to be released from the US government, and recently there are some concerns between the US government and Ethiopia, so does it have any effect on your company?
Joosub: We haven’t finalize that yet, of course the investment for the license come directly from partners in the consortium where they put the money into the fund. There are various financing options that are available and are going forward swiftly.
And of course now that they have got the license, a lot of that becomes more credible and now you start to further discuss with the define entities to look at the cost of funding. Of course there are various forms of funding; There’s development of funding, bank funding, and suppliers funding. So, there’s different sources of funds that you can look at including the investment that we’ve made directly as a consortium. But I think what’s encouraging is, you’ve got a credible consortium, which is made up parties like Sumitomo, CDC, Safaricom, Vodacom and Vodafone.
What we’re doing is we look at the sources of funding and of course, the cheaper you get your funding the more beneficiary you become on the business plan so we will look at all options including some suppliers funding and even when you’re choosing vendors, you consider, what is the suppliers funding that’s available from those particular vendors. As it is part of your decision-making process.
So regarding the US funding we haven’t finalized any funding with anybody. Of course we’ve had lots of discussions now after you actually got the license. First part was being able to pay. The second part is of course this historic awarding ceremony and then you know, now in the coming days and weeks it’s about finalizing suppliers, funding and so on.
Capital: You’re also set to launch low orbit satellites. So, how does it supplementary the existing network in Ethiopian and how much investment does it need?
Joosub: So the whole principle is to make sure that Ethiopia is always up to date with the latest technology. So, you know, we will launch 4G soon and after that we want to launch 5G, we’ve got a partnership with a company as the broader Vodafone group. We are going to beam a signal down from space, so we are always looking for these opportunities to partner. We had the similar opportunity when we looked at Loon in Mozambique. So we do look at these types of opportunities. We believe that our job is to connect people and we will use the most efficient technologies in all times to ensure that the people in the country are fully covered. So in that we will provide certain opportunities, and it’s important to be at the fore front of these new technologies to take full advantage of them.
Capital: How do you asses the current political situation in Ethiopia in regards to your business?
Joosub: I think the political developments are always important in any country where we encourage with the direction of the Ethiopian government. So you know that’s why we’ve simply put, we put our heart for the license and we think it’s important to be able to provide coverage and digital inclusion for the population.
Ethiopia and Kenya forge closer ties to bolster trade
By Tadesse Yimamu and Ahmed Farah
This week, the governments of Kenya and Ethiopia commenced operations of the Moyale-Moyale OneStop Border Post (OSBP) which is the first of its kind in Ethiopia and the fifth for Kenya and is expected to set a new tone in the trade relations between the two countries. Moyale is the only gazetted border crossing point between Kenya and Ethiopia.Bilateral trade between the 2 countries stands at USD 119 million in 2019 with Kenya taking the bigger share of exports to Ethiopia valued at US$ 67 million, while Ethiopia’s exports to Kenya were valued at US$ 52 million. This is expected to increase significantly with the operationalisation of the Moyale OSBP. This confidence in growthis bolstered by other infrastructure projects such as the Lamu Port South Sudan Transport (LAPSSET) corridor that will collectively accelerate socio-economic transformation in the respective countries.
A OneStop Border Post (OSBP) refers to the simplified and harmonised legal and institutional framework, facilities, and associated coordinated procedures and processes that enable goods, people, and vehicles crossing a border, to stop only once in the country of entry. They undergo necessary regulatory controls in line with applicable regional and national laws to exit the adjoining state and enter the host state. As a result, the clearance time at border crossing points is shortened. Kenya which has implemented several OSBPs has been able to demonstrate examples of this time reduction at Busia and Malaba where time to enter and exit the borders reduced by over 70%. OSBPs promote a coordinated and integrated approach to facilitating trade, the movement of people, and improving security. A baseline survey by TradeMark East Africa (TMEA) in 2017 indicates that it takes on average, 21 hrs. and 52 minutes (Kenya-Ethiopia) and 12.5 hrs. (Ethiopia-Kenya) for a cargo truck to cross the border.
To appreciate the potential ofthese new milestonesbetter, we probably need to understand the economic dispensation of both countries. According to the World Bank, Ethiopia’s economy has been experiencing growth averaging 9.4 percent annuallybetween 2010 to 2019 with real gross domestic product (GDP) growth having just slowed down to 6.1% in 2019/20 due to COVID-19.
Kenya on the other hand has a population of around 50 million people with its economic growth averaging 5.7 percent between 2015-2019, making it also one of the fastest-growing economies in Sub-Saharan Africa. Kenya’s economic growth potential is boosted by a stable macro-economic environment, positive investor confidence, and a resilient services sector.Looking at the macro-level economic performance of these two countries,Kenya and Ethiopia provide a market of 170 million people with a combined GDP of over US$190 billion.So, what do the comparative advantages for both countries look like?
Ethiopia has a nascent but growing manufacturing sector that contributes just around four (4) percent to the GDP. On the other hand, its agro-sector industry that includes leather products, coffee, forestry, natural gum, and floricultureare the country’s key exports.With this in mind, Ethiopia already exports cereals, minerals, tyres, concentrates, textile yarns and spices to Kenya.
The real opportunity here is how Ethiopia can use the new trade corridor in Lamu to reach new globalexport markets. Ethiopia also has the potential to establish and grow sectors such as transport and logistics, trade finance, and services sector to support its ambitions. Already, Safaricom has acquired a license to operate in Ethiopia’s telecommunications sector paving way for what could enhance synergy and infrastructure in mobile money payments that has been proven to enhance trade and financial inclusion.
Comparatively, Kenya’s manufacturing sector is much bigger contributing just about ten (10) percent to the GDP according to the Kenya National Bureau of Statistics. This offers Ethiopia an advantage to import some products directly from Kenya. For example, Ethiopia imports majority of processed beverages from South Africa, and now it can do so affordably and conveniently from Kenya.
Both Kenyans and Ethiopians can be proud of what the Moyale OSBP has in store. For adventurers and businesses alike, Moyale will be a busy hub of activities that will bring socio-economic development to both countries while also enhancing diplomatic relations and cooperation like it has never been seen before.
Tadesse Yimamu is TMEA Ethiopia’s Country Directorand Ahmed Farah is TMEA’s Kenya Country Director
