Aurelia Butler

Ageing populations are hitting public finances across the world, with rating agencies warning that recent interest rate rises have increased the impact of higher pensions and healthcare costs.As interest rates soar in response to the biggest surge in inflation for a generation, Moody’s, S&P and Fitch have all warned that worsening demographics are already hitting governments’ credit ratings. They add that downgrades are likely without sweeping reforms, threatening to create a vicious circle of higher fiscal burdens and rising borrowing costs. “In the past, demographics were a medium- to long-term consideration,” said Dietmar Hornung, associate managing director at Moody’s Investors Services. “Now, the future is with us and already hitting sovereign credit profiles.”The US Federal Reserve, European Central Bank and Bank of England all raised interest rates this month to their highest levels since the financial crisis — increasing governments’ debt servicing costs.“While demographics are slow-moving, the problem is becoming more urgent,” said Edward Parker, global head of research for sovereigns and supranationals at Fitch, which downgraded France’s credit rating last month, warning that president Emmanuel Macron’s reform agenda could stall. “We are well into the adverse effects in many countries, and they are only growing,” Parker added.

Rating agencies say the rise in borrowing costs is compounding both the impact on growth of changes in working age populations, and the hit to public finances of increasing healthcare and pension bills.This has affected the outlook for debt in the EU, where, according to the European Commission, the share of the population over 65 will rise from 20 per cent now to 30 per cent by 2050, as well as in Japan and the US. Marko Mrsnik, lead sovereign analyst at S&P Global Ratings, added that, according to an S&P stress test, a single percentage point increase in borrowing costs would increase debt to gross domestic product ratios for Japan, Italy, the UK and the US by around 40-60 percentage points by 2060.“That is a very significant increase, and implies reforms that either address ageing pressures or other fiscal reforms would likely be needed if government debt is to remain sustainable,” he said. S&P said in January that roughly half of the world’s largest economies will have been downgraded to junk by 2060, up from a current level of around a third, if measures are not taken to ease the costs of ageing populations.It estimated that, in the absence of reforms to ageing-related fiscal policies, the typical government would run a deficit of 9.1 per cent of GDP by 2060, a huge increase from 2.4 per cent in 2025. S&P also forecast that pension costs would rise by an average of 4.5 percentage points of GDP by 2060, reaching 9.5 per cent, albeit with a large variation among countries. The rating agency projected that, between 2022 and 2060, healthcare spending would rise by 2.7 percentage points of GDP for the median country.“The longer governments defer action, then the more painful that action will be,” said Parker of Fitch. In a possible sign of the pressure, Congressional Republicans are calling for spending cuts and structural budget reform in the highly charged confrontation over the US debt ceiling.Analysts say that worldwide, central and southern European countries have among the worst demographic profiles, while singling out Germany, whose population is ageing at one of the fastest rates globally.

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A Moody’s note this year said the strain on the German labour market was “already visible”, adding that: “potential growth will weaken further in the coming year without reform”. Rating agencies have also sounded alarm about the structural deficit of the pension system in Spain, where the government recently re-established a direct link between payments and inflation, as well as France’s record in managing its finances.But they credit Greece for sweeping reforms to its pensions system after its debt crisis. In S&P’s survey of 81 countries, it was the only state in which age-related spending was expected to fall by 2060.By contrast, several Asian countries have a deteriorating outlook because of demographic pressures. “If you look to 2050, then Korea, Taiwan and China are some of the countries with the worst profiles,” said Parker. Additional reporting by Barney Jopson in Madrid More

More than $15bn worth of exports that sustain a critical part of South Africa’s manufacturing industry is on the line as Pretoria battles the fallout from a US accusation that it covertly supplied arms to Russia.President Cyril Ramaphosa insisted this week that South Africa has not been “drawn into a contest between global powers” as he promised an inquiry into fresh claims that arms had been placed on to a sanctioned Russian vessel at a Cape Town naval base last year.But a sharp sell-off in South Africa’s currency and government bonds over the country’s most serious foreign policy crisis in years has pointed to the lopsided economic stakes for a country that on average sent less than 1 per cent of its exports to Russia over the past five years.Even as Ramaphosa’s ruling African National Congress attacked the US for encroaching on its sovereignty, South African businesses were sounding the alarm over the country’s prized participation in the African Growth and Opportunity Act, a US law that grants duty-free terms to specific nations.Railway wagons carrying iron ore for export at Saldanha Bay © Peter Titmuss/UCG/Universal Images Group via Getty Images“The prospect of a loss of tariff-free access to US markets . . . is now a very real risk,” said Business Leadership South Africa, an industry group. “When our current eligibility is reviewed, we should expect that South Africa could fail the access test of not threatening US national security interests.” South Africa exported more than $15bn worth of goods to the US in 2021, according to the US commerce department.While analysts do not expect South Africa to be immediately ejected from Agoa, Pretoria’s future participation in a deal that is up for renewal in 2025 was already in doubt. “South Africa technically does not qualify because it’s an upper middle-income country, so the US made a special exemption,” said Thabi Leoka, a South African economist.Agoa is vital to sustaining South Africa’s carmakers and the industries surrounding them, from ports to parts suppliers. More than four-fifths of the vehicles made for export in South Africa go to Europe or the US.Although China has surpassed the US as South Africa’s overall biggest trade partner, Chinese imports largely reflect demand for commodities such as chrome or iron ore, rather than more sophisticated wares that leave more value in the South African economy.

And yet South Africa has allowed US discontent to simmer for months, not just over whether the country’s official non-alignment in the Ukraine war has concealed covert aid to Russia, but also a lack of co-operation on anti-terrorism efforts, to the ANC going cold on US offers of financing a green transition.“The arms issue is just one example of a much deeper dissatisfaction in Washington DC with South Africa,” said Peter Attard Montalto, head of capital markets at Intellidex, the South African research firm.If the Kremlin has been toasting these tensions, it is unlikely to have been with South African sauvignon blanc.Only 0.2 per cent of South Africa’s overall exports went to Russia last year, versus 9 per cent to the US, according to Wandile Sihlobo, chief economist at South Africa’s Agricultural Business Chamber. Ten per cent went to China.“Russia is one of the least important export markets for South Africa’s total merchandise,” Sihlobo said.It is not just trade links at stake. Enoch Godongwana, South Africa’s finance minister, has said that while he believed US sanctions on his country were unlikely, the financial flows that could be affected it they did impose curbs were “massive”.South Africa’s reputation as a financial centre has already been knocked by its placement this year on an international “grey list” for falling behind on fighting financial crime.Employees work on manufacturing a car at a Volkswagen plant in the country’s Eastern Cape province © Michael Sheehan/picture-alliance/dpa/AP ImagesYet there are few signs that these signals are being picked up inside the ANC, which showed its scepticism of US ties through an official resolution last year that accused Washington of provoking war in Ukraine.South Africa’s army chief visited Moscow this week even as the arms-to-Russia furore rumbled on, while an ANC delegation met with Vladimir Putin’s United Russia party last month. Putin could yet visit South Africa while under indictment by the International Criminal Court for alleged war crimes, after an invitation from Ramaphosa to attend a Brics summit in August.Some of this can be put down to the ANC’s historic links to the Soviet Union, but the lack of any real economic interest stemming from the ties has led some to ask whether the ANC is setting policy on the basis of Russian money influencing the party itself.“There’s evidence that the ANC is benefiting from its relationship with Russia from a financial perspective . . . but they’re doing this at the cost of the economy,” said Leoka, the South African economist.In particular, Chancellor House, an ANC linked-company, has a stake in the consortium that owns mining group United Manganese of Kalahari with a company backed by Viktor Vekselberg, a Russian businessman who was sanctioned over what the US claims are close ties to Putin. Vekselberg denies wrongdoing. The company in which he has a stake owns 49 per cent of UMK, under the threshold at which sanctions would apply to the mine.UMK gave R25mn ($1.3mn) to the ANC in 2022, spread over two financial years, according to regulatory filings, of which R15mn was a donation in kind ahead of party elections in December. A cash shortage last year left the ANC struggling to pay staff salaries.Analysts say the real prize for Russia from ties to the ANC would be access to resources deals and contracts. Former president Jacob Zuma sought to give a nuclear power tender to Russia’s Rosatom worth tens of billions of dollars, before the South African courts thwarted it and Zuma was himself ousted in 2018.“The promise of future rent extraction [in resource deals] is probably more important than current cash flow considerations,” said Intellidex’s Attard Montalto. More

SINGAPORE (Reuters) – The dollar was firm on Wednesday, supported by a safety bid as the U.S. hurtled toward its borrowing limit and boosted after solid economic data had traders trimming bets on imminent rate cuts.The dollar hit a two-week peak of 136.69 yen overnight and hovered just below that at 136.35 early in the Asia session. It also broke above its 50-day moving average against the euro to trade at $1.0866 per euro.President Joe Biden and top congressional Republican Kevin McCarthy have edged closer to a deal to avoid a U.S. debt default – but nothing is clinched yet and ironically the risk the U.S. fails to pay debts has put a bid under the currency.”The dominance of the dollar in the global payments system provides a strong explanation as to why,” Rabobank strategist Jane Foley said.”A crushing blow to the world’s number one economy can only have negative shockwaves to the global economy, and reduce risk appetite, which would thus become a safe-haven event.”Rabobank forecast the euro falling to $1.06 in six months.Data showed Japan’s economic growth, at an annualised 1.6%, markedly beat market expectations last quarter – perhaps lending some stability to the yen which was been falling as higher U.S. yields have supported the dollar.Data showed U.S. consumer spending appeared to have increased solidly in April, which together with hawkish remarks from Federal Reserve officials weighed on bonds and against expectations that interest rate cuts are coming soon.Chicago Fed President Austan Goolsbee said it was “far too premature to be talking about rate cuts”, and Cleveland Fed President Loretta Mester said rates were not yet at a point where the central bank could hold steady, given stubborn inflation.Two-year yields rose seven basis points overnight to 4.12% and benchmark 10-year yields rose 4 bps to 3.55%. Interest rate futures pricing implies no chance of a rate cut in June, down from about a 17% chance seen a month ago.The Australian dollar fell 0.7% and through its 50-day moving average and last held at $0.6659. Sterling fell about 0.4% and last bought $1.2485.”Market participants continue to lower pricing for near term rate cuts by the FOMC,” said Commonwealth Bank of Australia (OTC:CMWAY) strategist Joe Capurso.”We expect some modest further increases in the dollar as markets continue to take out pricing for rate cuts. A rate hike is possible this year, though the hurdle is high.”The New Zealand dollar was broadly steady at $0.6239, with investors looking ahead to a 25 bp interest rate next week and perhaps one more after that.”We see a 20% chance of a 50 bp hike and a 5% chance of a pause,” analysts at ANZ Bank said. “Either could backfire by driving down future … expectations.”European inflation data is also due, though little deviation from preliminary figures is expected. U.S. mortgage and housing starts data is published later in the day.========================================================Currency bid prices at 0043 GMTDescription RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid Previous Change Session Euro/Dollar $1.0868 $1.0862 +0.06% +1.43% +1.0869 +1.0862 Dollar/Yen 136.3550 136.3500 +0.06% +3.96% +136.4650 +136.4350 Euro/Yen 148.20 148.15 +0.03% +5.63% +148.2900 +148.0800 Dollar/Swiss 0.8960 0.8966 -0.05% -3.08% +0.8965 +0.8960 Sterling/Dollar 1.2486 1.2487 -0.01% +3.24% +1.2490 +1.2481 Dollar/Canadian 1.3474 1.3479 +0.01% -0.51% +1.3480 +1.3480 Aussie/Dollar 0.6657 0.6654 +0.05% -2.34% +0.6661 +0.6653 NZ Dollar/Dollar 0.6239 0.6231 +0.13% -1.75% +0.6242 +0.6228 All spotsTokyo spotsEurope spots Volatilities Tokyo Forex market info from BOJ More

Australia’s treasurer Jim Chalmers got scant praise from political opponents this month for delivering the country’s first budget surplus in 15 years. A “drover’s dog” could have done as good a job, given surging commodity prices and a strong post-pandemic economic rebound, said Angus Taylor, the shadow treasurer.Chalmers rebutted those taunts, saying he had made “substantial progress in repairing the budget” since his Labor party returned to power after nine years. Australia was now in line for a A$4.2bn (US$2.8bn) surplus for the year, compared with previous estimates of a A$32bn deficit, he said.Yet, Chalmers admitted that the return to balancing the books would be fleeting, as Australia contends with a mounting bill for defence, welfare and an energy transition in what Labor has said will be “a defining decade” for the country.Anthony Albanese, the prime minister, has set Labor on a cautious course in its first term in government for a decade and has been keen to dispel the notion that his party is not a good custodian of the budget.In social policy, Labor has delivered on election promises to increase spending on childcare, single-parent families and care workers. On defence, Labor has maintained its commitment to the Aukus agreement — a trilateral defence partnership with the US and UK built around the delivery of nuclear-powered submarines to Australia — and boosted spending as it firms up regional security ties with allies, including Japan.Many observers argue, however, that more should be done to reshape Australia’s economy at a time when strong commodity prices are cushioning the cost of the multiple international and domestic challenges, which include the costs of an ageing population and rising debt service payments.Australia’s treasurer Jim Chalmers arriving to deliver last week’s budget at Parliament House, Canberra © Hilary Wardhaugh/Bloomberg“The terms of trade will be strong for a number of years. But when these conditions normalise then Australia has a lot of problems,” said Peter Costello, chair of the country’s sovereign wealth fund, the Future Fund, and the longest-serving treasurer in Australia’s history.Australia has enjoyed a broad economic boom for three decades as its commodities — principally iron ore, gas and coal — have underpinned China’s massive infrastructure rollout and Japan and South Korea’s energy needs. But China’s own slowing growth raises questions over how long Australia can sustain its momentum.Australia’s net debt position — which is due to rise to more than A$700bn by 2027 according to budget estimates — was of particular concern, Costello said. He said it was not sustainable to run a structural deficit of 2 to 3 per cent of GDP and called for more fiscal discipline to get the budget back into shape.

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“Overall it’s a good result but I don’t think it’s solved our medium- and long-term problems,” said Costello, who was a Liberal politician. Danielle Wood, chief executive of the Grattan Institute think-tank, agreed that there was a “pretty stubborn gap” between revenue and spending forecasts in upcoming budget projections, suggesting that more action would need to be taken to address the structural deficit — the gap between projected revenue and expenditure when stripping out the impact of high commodity prices. Spending on defence, for example, is expected to rise to more than A$50bn for the first time in the 2024 budget year as the country prepares for the advent of nuclear-powered submarines and long-range missiles. Meanwhile, the cost of the country’s disability support scheme is expected to rise from A$35bn to A$56bn in the 2027 budget year. Chalmers has, however, detailed substantial cuts to some defence projects and the scope of the disability scheme to stop costs blowing out even further. Coal at a mine near Mudgee, New South Wales. Australia’s iron ore, gas and coal have underpinned China’s infrastructure rollout and Japan and South Korea’s energy needs © David Gray/ReutersWood said Labor had exercised political caution in the budget despite riding high in the polls. That reflected the party’s “incrementalist approach” under Albanese and a need to counter accusations from the Liberal party that Labor overspends when it is in charge.Wood said Australia’s long record of economic growth had made it harder to push through significant reform in areas such as income tax, where Labor has refused to back away from cuts promised to high earners under the previous Liberal regime.“Australians are not used to hard decisions being made,” she said. “We have been very lucky,” she added, with commodity prices that had “cushioned the blow” of problems including the global financial crisis, the spread of Covid-19 and inflation.

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Labor’s reform agenda may have also been constrained by the backdrop of high inflation and a cost of living crisis. Chalmers said his spending measures had been “carefully calibrated” not to fuel a rise in consumer spending at a time when the Reserve Bank of Australia has raised interest rates 11 times in the space of a year.Gareth Aird, head of Australia economics at bank CBA, said the impact of cost of living increases was being felt particularly among younger people.

“The starting point for the economy is a good one — very low unemployment. But for a lot of households the economy isn’t quite working for them,” he said, pointing to negative wage growth in real terms coupled with rising mortgage rates or sky-high rents. “I think once inflation has come back to more acceptable levels and the RBA has started to lower rates there will be a greater focus on medium-term reform — or at least there should be.”Chalmers’ budget message was that he had performed a balancing act with a responsible plan while meeting election promises on welfare without adding to inflation. But Costello — who in his time as treasurer oversaw 12 budgets including 10 surpluses — suggested Chalmers might already have missed his moment for major budget reform, saying this was always easiest in the first year of government. “From then on it gets harder,” he said. More

Failure to raise the federal debt limit by June 1, when the U.S. Treasury could run out of money to pay the government’s bills, would result in a first-ever default that could trigger a devastating recession.Biden, a Democrat, and top congressional Republicans have battled over the debt ceiling for months, with Biden asking lawmakers to raise the self-imposed borrowing limit without conditions and Republicans demanding sharp spending cuts to address a growing deficit.PRESIDENT JOE BIDEN”We just finished another good, productive meeting with our congressional leadership about a path forward to make sure that America does not default on its debt for the first time.””There’s still work to do. And I made it clear to the Speaker and others, that we’ll speak regularly over the next several days, and the staff’s going to continue meeting daily to make sure that we do not default.””I’m confident that we’re going to continue to make progress toward avoiding default and fulfilling America’s responsibility as a leader on the world stage.””There was an overwhelming consensus, I think, in today’s meeting with the congressional leaders, that defaulting on the debt is simply not an option. Our economy would fall into recession.””It’s disappointing that in our discussions, the congressional Republicans have not been willing to discuss raising revenues, but the policy differences between the parties should not stop Congress from avoiding default.”REPUBLICAN KEVIN MCCARTHY, SPEAKER, HOUSE OF REPRESENTATIVES”We set the stage to carry on further conversations. We only have really 15 days to go. We’ve got to find a way that we can curb our spending, raise our debt limit and also grow our economy. The president agreed to appoint a couple of people from his administration to sit down and negotiate directly with my team.””But we’ve got a lot of work to do in a short amount of time.””It is possible to get a deal by the end of the week. It’s not that difficult to get to an agreement.””What has changed in this meeting is, the president changed the scope of who’s all negotiating. Instead of all the four leaders, he’s finally taking Leader McConnell’s advice … Appoint somebody from the president’s team who could work with the speaker’s team to see if we could come to an agreement.””Nothing has been resolved in this negotiation. So, the only thing that has changed is we finally have a format that has proven to work years in the past.”DEMOCRAT CHUCK SCHUMER, SENATE MAJORITY LEADER”It was a good and productive meeting. Everyone agreed that default would be the worst outcome, a horrible situation for America and America’s families. But we also agreed that we need to pass a bipartisan bill with bipartisan support in both chambers.””We don’t have much time, but default is just the worst, worst alternative, and having a bipartisan bill in both chambers is the only way, the only way we’re going to avoid default.””We have to come to common ground. That’s the only way that this has ever gotten done. It has never gotten done with one party saying, you have to do it my way. You have to get both parties in both houses together.””We’ll have to come together on something that can avoid default. Default is a disaster. Full stop. And everyone understood that in the room.”MITCH McCONNELL, SENATE REPUBLICAN LEADER”Seven of the last 10 debt ceilings have carried something else. What the Speaker and I are advocating here is not unusual. It’s more common than not.””This shouldn’t be this hard. Number one, we know we’re not going to default. They know it, we know it. We’re running out of time.””As the Speaker has pointed out, the president’s agreed to designate somebody to be the lead, as I recommended to President Trump in 2019. We faced the same situation. You think he wanted to negotiate with Speaker Pelosi? Of course not. I said, ‘You have no choice.'”HAKEEM JEFFRIES, HOUSE DEMOCRATIC LEADER”It was a positive meeting. I thank the president for once again convening us. It was an open and an honest, but a very cordial discussion. We all agreed that the only path forward is to reach a bipartisan agreement, anchored in common ground.””We all agreed that default is not an acceptable option, and must be avoided. And we all agreed that over the next few weeks we have to proceed with the fierce urgency of now, in order to make sure we can reach that bipartisan, common-sense, common-ground agreement, so that we can protect the health, the safety and the economic well-being of the American people.”WHITE HOUSE PRESS SECRETARY KARINE JEAN-PIERRE”President Biden will return to the United States on Sunday, following the completion of the G7 summit, in order to be back for meetings with congressional leaders to ensure that Congress takes action by the deadline to avert default.””The president has made clear that members of Congress from both parties and chambers must come together to prevent default, as they have 78 times before. The president and his team will continue to work with Congressional leadership to deliver a budget agreement that can reach the president’s desk.”NEIL BRADLEY, CHIEF POLICY OFFICER, U.S. CHAMBER OF COMMERCE”With just two weeks to go before hitting the debt limit, we are pleased to see the scope and structure of the negotiations narrow. We believe there is a path forward on a bipartisan deal that lifts the debt limit and makes important reforms to improve our nation’s fiscal health.””Both sides already agree that we must rescind unspent COVID funding, implement discretionary spending caps, and reform the federal permitting process.””We urge the president and congressional leaders to consider these common goals as they continue to work towards an agreement to prevent economic crisis. It is impossible to overstate the sense of urgency and the negative consequences that would occur if the United States were to default on its debt.” More