The UN has warned about the threat of the third phase of the global financial crisis

The third phase

In its new annual report, the UN Conference on trade and development (UNCTAD) acknowledged that in 2016 the world economy remains in a fragile state”. This year, according to the forecast organization, global growth will decline for the first time since 2012 and will amount to 2.3% compared to 2.5% in 2014 and 2015. Thus a significant proportion of concerns to UNCTAD cause risks of financial and economic instability in developing countries.

If QE really ended and interest rates in developed economies will continue to grow, the next phase of the global financial crisis should be expected from emerging markets, said the Director of economic Affairs UNCTAD Kozol Richard Wright, quoted by the Financial Times. The first two phases was the financial crisis of 2008-2009 and the Eurozone debt crisis in 2011-2012.

“Now there is a real danger of joining the third phase of the financial crisis that began in the US housing market in late 2007 and then spread to the sovereign debt market of the Eurozone”, — the report says.

This time the concern of the UN, in contrast to previous episodes of crisis, is the financial stability of emerging economies and the risk of unwinding them in a deflationary spiral, according to the report. The recent crisis in emerging markets dates back to the years 1997-1998.

After the 2009 crisis, like the UNCTAD, developing economies are faced with a large inflow of financial capital and cheap credit — this process is fueled by the quantitative easing programmes in developed economies. Now, however, the debt load of the corporate sector in emerging economies takes the “warning signs”, notes UNCTAD. The volume of corporate debt to banks in this group of countries is now $25 trillion, or 104% of their combined GDP. A considerable part of funds (about two thirds) were directed to the sectors that are heavily dependent on economic cycles and do not contribute to the structural transformation of the economy. We are talking about the oil and gas sector, power industry, construction, mining sector, etc.

In addition, as noted in the report, the number of companies in emerging markets began to “imitate” the behaviour of companies from developed economies in terms of the direction of profits to reward shareholders (stock buybacks, dividends), rather than investment in production capacity.

Deflationary threat

UNCTAD notes that if the global slowdown is more serious than it is now, corporations will not be able to repay a significant portion of its debt, including to foreign banks. This creates serious risks for the stability of the world financial system. On possible problem is the outflow of foreign capital from emerging markets in the first quarter of 2016 compared with $185 billion after an outflow of $656 billion in 2015.

The report States that after the financial crisis of 2008-2009, the developing countries are unable to restore economic growth. UNCTAD does not rule out that emerging economies, including Russia, Brazil and South Africa, could face a deflationary spiral (the process by which the decline of the economy is deflation, which, in turn, exacerbates the economic downturn). A similar process has already felt Europe and Japan, but emerging economies this has not yet been encountered.

UNCTAD estimates, the Russian economy in 2016 will be reduced by 0.3%. Moreover, a deflationary spiral is already happening in several countries, including major developing economies such as Brazil, Russia and South Africa,” says OU UN explaining why Russia also carries this risk. In August 2016 in Russia for the first time in five years stopped the growth of prices on a monthly basis, previously reported . The Finance Ministry expects inflation at the end of 2016 will amount to 5.7% — a historic low, said this month the Deputy Minister of Finance Maxim Oreshkin.

UNCTAD notes that for the solution of global economic problems required coordination among the largest and most important for the global economic system countries, which is still there. “We need a new agreement at the global level in order to go beyond the status quo” — the authors of the document.