Economic recovery from COVID19 is neither green nor sustainable

The International Energy Agency (IEA), which I consider to be the global gold standard for energy data, warns that in 2021 global carbon dioxide emissions are set for their second biggest increase in history.

This huge spike is second to the massive and carbon-intensive rebound after 2008 financial crisis.

Global Energy Report 2021 of IEA predicts a 1.5 billion tonnes rise in global energy related CO2 emissions, driven by a strong rebound in demand for fossil fuels and especially coal in electricity generation.

I would like to summarise the key findings of the report:

  • Global energy demand is set to increase by 4.6% in 2021, and nearly 70% of this projected increase is in emerging markets and developing economies.
  • Demand for all fossil fuels is set to grow significantly in 2021. Coal demand alone is projected to increase by 60% more than all renewables combined.
  • Despite an expected annual increase of 6.2% in 2021, global oil demand is set to remain around 3% below 2019 levels.
  • Coal demand is on course to rise 4.5% in 2021, with more than 80% of the growth concentrated in Asia.
  • Natural gas demand is set to grow by 3.2% in 2021, driven by increasing demand in Asia, the Middle East and Russia.
  • Electricity demand is due to increase by 4.5% in 2021, or over 1 000 TWh. This is almost five times greater than the decline in 2020, bolstering electricity’s share in final energy demand above 20%.
  • Demand for renewables grew by 3% in 2020 and is set to increase across all key sectors – power, heating, industry and transport – in 2021. Solar PV and wind are expected to contribute two-thirds of renewables’ growth. The share of renewables in electricity generation is projected to increase to almost 30% in 2021.
At the launch of the report Fatih Birol, the IEA Executive Director and a leading authority on energy and climate said “This is a dire warning that the economic recovery from the Covid crisis is currently anything but sustainable for our climate… Emissions need to be cut by 45% this decade, if the world is to limit global heating to 1.5C (2.7F), scientists have warned. That means the 2020s must be the decade when the world changes course, before the level of carbon in the atmosphere rises too high to avoid dangerous levels of heating. But the scale of the current emissions rebound from the Covid-19 crisis means our starting point is definitely not a good one”
In my opinion, the findings of the report are alarming and unsettling. On the one hand, governments around the world declare the climate change their priority, on the other hand they aim a recovery by more investment through fossil fuels. I believe the financial institutions should definitely take this point into account while drawing their medium term strategies.
I would like to conclude with Fatih Birol’s warning “Unless governments around the world move rapidly to start cutting emissions, we are likely to face an even worse situation in 2022. The Leaders Summit on Climate hosted by US President Joe Biden this week is a critical moment to commit to clear and immediate action ahead of COP26 in Glasgow”.

LIBOR replacement

The Libor (London Interbank Offered Rate) is an indispensable instrument for the entire financial sector, the one that gives direction. Published daily in London since 1986, this reference, on which $300 trillion of financial contracts are indexed, will disappear at the end of 2021, along with the other interbank rates (Ibor).

It will be replaced by SOFR (Secured Overnight Financing rate) in the US, SONIA (Sterling Overnight Index Exchange) in the UK, TONA (Tokyo Overnight Average rate) in Japan, ESTER (EURO Short-term rate) in Europe, and SARON (Swiss Average Rate Overnight) in Switzerland.

According to my reading of various opinions on the matter, these new rates are considered to be more transparent and robust.

LIBOR has lost its credibility after the revelation in 2011 of the deliberate manipulations by banks. From my point of view, one of the main weaknesses of LIBOR is that it is calculated on the basis of banks’ estimates of the rates at which they could borrow on the interbank market. This method made large-scale manipulations possible.
I do not consider the new model and rates as miracle solutions. Nevertheless, I believe the substantial involvement of regulators will ensure a more reliable reference for the markets.
Transition to this model is no doubt will be very pricey and very complicated especially for banks. Among the main challenges, I must site the identification and management of their existing instruments benchmarked to former rates and the conversion of existing contracts containing  those rates , so called “tough legacy,”. Also the last but not least, possible shortcomings of new rates.
Swiss financial industry has undergone very significant changes and difficult times since 2008. I believe SARON can offer the sector an opportunity to demonstrate its competitiveness and savoir-faire.

Worried for jobs, but unwilling to return to the office

There are a growing number of articles and reports, which leaves especially small and medium size business owners rather perplexed.

One of the major human resources specialists, Manpower, conducted a recent survey, which I find very interesting and representative in this regards.

According to the survey; while nine out of ten working people consider keeping their job to be the most important thing at the moment, due to an unprecedented and COVID induced economic crisis everyone fears for their jobs. Nevertheless, returning to the office is still a source of restraint for 94% of those surveyed. Interestedly, work/life balance seems to have become an even more important criterion for employees since the start of the Covid-19 pandemic than it was even before it began.

I believe, this will become a major area of conflict between the employers and employees when as the spread of Covid-19 slows or even disappears and the COVID fighting measures are lifted. And when employees currently teleworking will be called back to the office.
Although I understand people desire to work more flexibly and less, I do not see how the same level of incomes can be maintained this way especially at this time of economic contraction.
In my opinion, the society has been undergoing a major transformation regarding its relations with growth, consumption and sustainability over the past decade and that COVID -19 only accelerated this transformation.
Maybe the next survey should ask; are you willing to consent to lower incomes for more flexibility?

Have we learned from history – Current crisis vs. 2008

By far not all the lessons of the 2008 financial crisis have been learned. And those that have been learned have not necessarily been applied. Nevertheless, one of them – drawn and applied – will certainly have been of great help in the current crisis.

At least it has helped to limit the economic catastrophe: the need for well-capitalized banks. This is what can be drawn from Bank for International Settlements (BIS) December 2020 report.

BIS, aka central bank of central banks, says that the banks have served as a “reliable first line of defense” and that “backed by swift action by the authorities, banks helped to limit economic stress at the beginning of the pandemic”.

I must stress the fact that the starting point of 2008 crisis is very different than the actual one. Back then, the crisis came from a freewheeling financial sector, overwhelmed by bets on sub-prime mortgages, which have proved to be much more dangerous than expected. Poorly capitalised, many banks that had considered risk management as a trivial activity found themselves on the brink of collapse, with some having to seek state support. In the actual case, the crisis did not initiate from the financial sector and it affects entire global economy.

I would like to provide some numbers from the report at this point: International bank lending to financial and non-financial borrowers fell by 5.2% in 2008. Conversely, these same loans increased by 4.8% in the first half of 2020. This, “even though economic activity has contracted more than during the great financial crisis of 2007-2009”, the authors of the study point out. The decline in global growth was 0.2% in 2008, compared with -9.1% in the first half of this year.
The authors of the study add that “foreign lending to the non-financial private sector – a measure of credit to the ‘real economy’ – has also remained robust”. In the first six months of the year, they fell by only 0.5%, compared to a drop of 11.8% in 2008. Similarly, local loans in local currency also grew at the historically high level of 8.6%.
I believe one must admit that the vast measures and assistance of governments, such as state guarantees for loans, have also helped. Central banks ensuring the supply of liquidity prevented the health crisis from turning into a financial crisis.

UNCTAD warns COVID-19’s economic fallout will long outlive the health crisis

Geneva is not only a global trade finance hub; it is also home to United Nations and many of its agencies. One of the most prominent ones among these agencies is United Nations Conference on Trade and Development (UNCTAD).

Having established in 1964 as a permanent intergovernmental body, UNCTAD is the main authority of the General Assembly in the sphere of trade and development. Its purpose is promotion of trade and development, particularly in developing countries.

UNCTAD released a report in end-November, where it concluded that COVID-19’s economic fallout will long outlive the health crisis. Announcing the report, UNCTAD Secretary -General Mukhisa Kituyi warned also of an increase in extreme poverty.

Let me set-out the forecasts of the report first: UNCTAD estimates 4.3% decline in global GDP in 2020, a figure very close to that of the IMF at 4.4%. The report sounds also rather unconvinced regarding the rapid commercialisation of a vaccine against Covid-19.
Based on these forecasts the agency draws a rather bleak picture.  Since UNCTAD’s main area of interest is developing countries, the report is quite realistic from my point of view. I would like to highlight some excerpts from the report:

  • The crisis could send an additional 130 million people into extreme poverty.
  • It finds that the pandemic’s impact has been asymmetric and tilted towards the most vulnerable, both within and across countries, affecting disproportionately low-income households, migrants, informal workers and women,
  • Global poverty is on the rise for the first time since the 1998 Asian financial crisis. In 1990, the global poverty rate was 35.9%. By 2018 it had been curtailed to 8.6% but has already inched up to 8.8% this year and will likely rise throughout 2021
  • Additionally, COVID-19 has had an excessive effect on two sectors – tourism and micro, small and medium-sized enterprises – which employ many vulnerable groups

These and other setbacks, such as school closures that threaten 20 years of progress in expanding access to education, especially for girls, will have strong negative impacts on the productive capacity of countries well into the future.

The report calls for a more vigorous international assistance, including debt relief to many poorer nations so they can tackle the pandemic’s economic impacts.
Secretary-General of UNCTAD  said “The Covid-19 pandemic has seriously undermined the global economy, with far-reaching consequences for all. The spread of the virus has benefited from the interconnectedness that underpins the global economy and played on its weaknesses, transforming a global health crisis into a global economic shock that hit the most vulnerable hardest. The time has come to address the weaknesses of globalization that have led to the rapid spread of the virus around the world and its uneven economic impact.
The UNCTAD report also highlights the possible positive impact of the health crisis on the organisation of trade and the fight against global warming. The UN agency also sees this as an opportunity to be seized. According to the report, the crisis can “catalyse the emergence of new, more resilient production networks based on shorter, more regional, sustainable and digital value chains”. It is also, according to its editors, an opportunity to make production “greener”.