THE International Monetary Fund (IMF) has been warning about a global economic downturn and possible financial meltdown for several months now.

IMF managing director Christine Lagarde’s latest warning about a “four clouds” overhang that might cause a “storm” prompted Finance Minister Lim Guan Eng to declare that Malaysia will weather the global economic storm. It is the first public acknowledgment by a senior Pakatan Harapan government official of the economic downturn.

Meanwhile, the 16-member Economic Action Council (EAC) has just been formed, with the aim of scrutinising and acting on the country’s economic and financial issues, as well as the people’s welfare, such as the cost of living, human resources, poverty and home ownership.

According to Lagarde, the four clouds forming to possibly trigger the storm are trade tensions and tariff escalations, financial tightening, uncertainty of the Brexit outcome, and the spillover effects of the accelerated slowdown of China’s economy.

However, there is a fifth cloud: the twin debt bubble and unwinding of the US dollar carry trade.

Governments and corporations were taking advantage of the low borrowing cost, the close-to-zero US interest rate to invest in assets that provided higher returns. The lucrative spread between the interest rates of currencies facilitated a currency carry trade and enabled vast borrowing to take advantage of the low interest rate of the US dollar.

According to the IMF Global Debt Database, as at end-2017, the total value of global debt in nominal terms for both the public and private sectors reached an all-time high of US$184 trillion. With the global gross domestic product of US$79.9 trillion in 2017, it means that global debt was 230% of GDP. On average, it is US$86,000 debt per capita, compared with only US$17,300 average GDP per capita. In the decade since the 2008 financial crisis, the debt skyrocketed by 60%.

The world’s top three borrowers are the US, China and Japan. According to the world debt clock, the debts of these countries are US$21.9 trillion (the US), US$9.08 trillion (China) and US$11.8 trillion (Japan). As the US dollar is the reserve currency of the world, the US can perpetually create financial instruments to facilitate debt spending and go seemingly unpunished. Japan is able to weather such humongous debt and prevent a debt crisis at least for now because of its large trade surplus and huge foreign exchange reserve.

As for China, the private-sector debt is alarming. China has led emerging economies in accumulating private-sector debts since the last global financial crisis. According to the Bank of International Settlements Quarterly Review, as at end-June 2018, US dollar-denominated debt to non-bank borrowers outside the US reached US$12.8 trillion. Of that total, US$3 trillion was borrowed by China Incorporated and its subsidiaries.

With the rising US interest rate, Chinese corporations that borrowed heavily are now caught in the unwinding US dollar carry trade. China’s growth rate in the fourth quarter of 2018 stood at 6.2%, the lowest since three decades of double-digit growth.

With the US-China trade war still looming, and China’s private sector choked with the rising US interest rate bringing to a toll in the dollar carry trade, the outlook for China’s economy as a whole is not bright. Any serious crisis will have serious ramifications for other Asian countries, including Malaysia, that rode on China’s phenomenal growth in the last few decades.

Recent history in the global stock market sell-off in 2015 and 2016 is indication for concern. The 43% drop in the Shanghai Stock Exchange Composite Index within two months in 2015, the slowing GDP in China and the devaluation of the yuan triggered the global stock market sell-off.

With Chinese corporations vulnerable to the rising interest rate, and global debt at a crisis point, any one of the five clouds could trigger an abrupt sell-off in stock, commodity and financial markets, causing a contagion effect to the rest of the world.

We hope that members of the newly formed EAC are mindful of the possible trigger points for the world economic panic contagion before putting emphasis on the welfare economics they are chartered to do. – February 14, 2019.

* Captain Dr Wong Ang Peng is a researcher with an interest in economics, politics, and health issues. He has a burning desire to do anything within his means to promote national harmony. Captain Wong is also a member of the National Patriots Association.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.