Week Ahead – Markets on Edge as Trump’s Inauguration and BoJ Decision Loom

Economic

Summary:

Markets brace for impact ahead of Trump’s inauguration.BoJ seen raising rates at first gathering of 2025.Euro and Pound traders turn gaze to PMIs.Canada and New Zealand CPI data to shape BoC and RBNZ bets.World Economic Forum in Davos also in focus.

Trump takes the oath of office

Another interesting week lies ahead of us, with the spotlight falling on the inauguration of US president-elect Donald Trump on Monday, and on the BoJ, which is kickstarting the first round of central bank decisions for 2025 on Friday.

Getting the ball rolling with Trump and the US, the dollar has benefited and Treasury yields have surged lately on increasing expectations that the Fed may need to proceed with extra caution on rate cuts this year. Trump’s tariff pledges and his promises of corporate tax cuts and deregulation have raised concerns about a resurgence of inflation, which has been proving sticky even before such policies are enacted. What’s more, the US economy seems to be firing on all cylinders, with the labor market seeing strong growth in November and December, corroborating the notion that there is no need for the Fed to rush into lowering interest rates further.

According to Fed funds futures, investors are currently expecting 40bps worth of reductions by December 2025, which is a more hawkish projection than the Fed’s own upwardly revised ‘dot plot’, which pointed to two 25bps reductions. And this is even after news headlines suggested that the new US administration is likely to adopt a gradual approach on tariffs and after the US CPI numbers for December came in somewhat softer-than-expected.

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With all that in mind, investors may be eagerly awaiting Trump’s inauguration speech for more clues about how he plans to proceed with his policies, and this is evident by the fact that the implied volatility of 1-week expiry FX options has been trending north and has continued to rise even after factoring in Monday’s inauguration. In other words, market participants see the event as a source of volatility for the FX market.

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Should Trump sound more hawkish on tariffs than the latest headlines suggest, the dollar is likely to take another shot in the arm as Treasury yields rebound. A potentially risk-averse mood could also weigh on equities, specifically stock futures, as the New York Stock Exchange will remain closed in celebration of Martin Luther King Day. However, whether any declines will be sustained will also depend on whether Trump will bolster the hype about extending corporate tax cuts, which is a supportive variable.

Stock traders will have more to digest the following day as Netflix will report its earnings results for the last quarter of 2024.

Will the BoJ hike rates right off the bat?

Flying to Japan, the BoJ will kickstart the first round of central bank decisions for 2025 on Friday. At its last meeting for 2024, the BoJ decided to refrain from hiking interest rates, with Governor Ueda saying that they need more information to raise interest rates again, placing emphasis on wages and the uncertainty surrounding US president-elect Trump’s economic policies.

Since then, data revealed that the Nationwide CPI accelerated notably in November, while the closely watched Tokyo prints pointed to even hotter price pressures in December. Wages also sped up in November. What’s more, the Summary of Opinions from the December gathering suggested that a hike may be on the cards sooner than investors were led to believe following Ueda’s press conference.

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Combined with hawkish remarks by several policymakers thereafter, including Ueda this week, who said that he heard many encouraging views on potential pay hikes since the turn of the year, the aforementioned developments prompted investors to pencil in around an 80% chance of a quarter-point interest rate increase on Friday.

Having said that though, the BoJ has a strong record of disappointing hawkish bets, and this may be another one of those occasions if president-elect Trump sounds too aggressive about his tariff plans at his inauguration speech on Monday. Therefore, if the Bank refrains from hitting the hike button once again, the yen is likely to tumble.

The opposite could be true should policymakers agree to hike, but the risks may be asymmetrical. The negative impact on the yen if the Bank were to stay on hold may be larger than the positive impact associated with a hike. Nonetheless, a falling yen may not be the easiest trade in town as further declines may encourage a new round of intervention by Japanese authorities.

January PMIs the drivers for Euro and Pound

From the Eurozone and the UK, the preliminary S&P Global PMIs for January are coming out on Friday. The euro and the pound have been bleeding recently, with the former falling victim to the widening divergence in monetary policy expectations between the ECB and the Fed and the latter feeling the heat of fears about a Truss 2.0 episode as well as the latest round of weak UK data. Just this week, the softer-than-expected inflation data for December was followed by weak GDP, December retail sales, and industrial production numbers for November.

Both the ECB and the BoE are expected to cut interest rates more aggressively than the Fed this year, with the former seen cutting another 95bps and the latter another 60bps. Thus, PMIs pointing to more troubles for the Eurozone and UK economies could further widen the policy divergence between the ECB and the BoE with the Fed and thereby deepen the wounds of the euro and the pound.

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The US S&P Global PMIs will also be released on the same day, but dollar traders will be already digesting Trump’s policy signals and thus, the impact of those numbers may be limited and short-lived.

Loonie and Kiwi traders await CPI reports

Following this week’s US CPI figures, Canada and New Zealand are scheduled to release their own inflation prints on Tuesday. The Canadian jobs report for December revealed strong employment gains, with the unemployment rate unexpectedly dropping. Still, investors are assigning a decent 65% for the BoC to cut interest rates by another 25bps on January 29. For that probability to be lowered meaningfully, Canada’s CPI numbers may need to come in hotter-than-expected, which could encourage loonie traders to increase their long positions. A positive business outlook survey by the BoC on Monday may also help.

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In New Zealand, a February rate cut seems to be a done deal. The question is whether it will be a quarter- or a half-point cut. At their November gathering, RBNZ policymakers cut the cash rate by 50bps and signaled that if economic conditions continue to evolve as projected, they could lower the OCR further early in 2025.

Since then, GDP data revealed that the economy slipped into technical recession in Q3, allowing investors to assign a strong 65% chance that another bold 50bps reduction may be looming, especially as inflation rested at 2.2% y/y in Q3, very close to the midpoint of the Bank’s 1-3% target range.

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Ergo, should next week’s data reveal that inflation returned, or even fell below that 2% midpoint, market participants may start considering a larger 75bps reduction, and the kiwi could resume its prevailing steep downtrend against its US counterpart.

Global leaders gather in Davos

Elsewhere, the World Economic Forum in Davos, Switzerland will take place. The meeting gets underway the same day with Trump’s inauguration and thus, Trump is expected to deliver a speech virtually on Thursday. Other speakers include Ukrainian President Zelenskyy, who will attend in person and speak on Tuesday.

Geopolitical tensions will be one of the main topics at the gathering, and thus, it will be interesting to see what risks global leaders foresee for their economies this year. Their views on Trump’s agenda may be closely monitored as well, while artificial intelligence will also be a key topic of discussion.

Source:XM

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Warren Takunda

Economic

The Bank of Japan is expected to raise interest rates on Friday barring any market shocks when U.S. President-elect Donald Trump takes office, a move that would lift short-term borrowing costs to levels unseen since the 2008 global financial crisis.

A tightening in policy would underscore the central bank's resolve to steadily push up interest rates, now at 0.25%, to near 1% - a level analysts see as neither cooling nor overheating Japan's economy.

At the two-day meeting ending on Friday, the BOJ is likely to raise its short-term policy rate to 0.5% unless Trump's inaugural speech and executive orders upend financial markets, sources have told Reuters.

In a quarterly outlook report, the board is also expected to raise its price forecasts on growing prospects that broadening wage gains will keep Japan on track to sustainably hit the bank's 2% inflation target.

A hike by the BOJ would be the first since July last year when the move, coupled with weak U.S. jobs data, shocked traders and triggered a rout in global markets in early August.

Keen to avoid a recurrence, the BOJ has carefully prepared markets with clear signals by Governor Kazuo Ueda and his deputy last week that a rate hike was on the cards. The remarks caused the yen to rebound as markets priced in a roughly 80% chance of a rate increase on Friday.

There were also hints of near-term action last month. While the BOJ held off raising rates at the Dec. 18-19 meeting, hawkish board member Naoki Tamura proposed pushing up rates. Some of his colleagues also saw conditions fall into place for an imminent rate hike, minutes of the meeting showed.

With a policy tightening this week seen as a near certainty, market attention is shifting to Ueda's post-meeting briefing for clues on the timing and pace of subsequent increases.

As inflation has exceeded the BOJ's 2% target for nearly three years and the weak yen has kept import costs elevated, Ueda is likely to stress policymakers' resolve to continue raising interest rates.

But there is good reason to tread cautiously. While the International Monetary Fund raised its forecast for global growth in 2025, Trump's policies risk destabilising markets and stoking uncertainty about the outlook for Japan's export-reliant economy.

Domestic political uncertainty could heighten, too, as Prime Minister Shigeru Ishiba's minority coalition may struggle to pass budget through parliament and win an upper house election scheduled in July.

The economic damage caused by past ill-fated rate hikes also haunt BOJ policymakers. The BOJ ended quantitative easing in 2006 and pushed short-term rates to 0.5% in 2007, moves that triggered a storm of political criticism as delaying an end to deflation.

The BOJ cut rates from 0.5% to 0.3% in October 2008, then to 0.1% in December of that year, as the global financial crisis pushed Japan into recession. Since then, various unconventional steps have kept borrowing costs stuck near zero.

"Japan had a permanently low growth rate, inflation rate and lower level of interest rates. So policymakers, investors and the business community still ask - have we really broken free from that?," said Jeffrey Young, chief executive officer of DeepMacro.

"The BOJ is going to have to explain very carefully that they're raising rates to move away from the extraordinary policy that they adopted."

Source: Reuters

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Owen Li

Economic

Industrial production in the eurozone grew for the second month in a row as the October figure was revised upward to 0.2% growth.

Still, this comes on the back of a large decline in September, so it's unclear if manufacturing will have contributed positively to GDP growth in the fourth quarter.

The recently announced annual GDP figure for Germany indicates that its economy contracted once more in the fourth quarter of 2024, and we anticipate zero growth for the entire bloc.

Nevertheless, country contributions to industrial production showed broad-based growth in the larger countries in November with Germany actually leading the way with 1.3% month-on-month. Ireland – notorious for volatile production figures – showed a -5.8% decline, which dragged down the average. France and Italy also saw production increases.

While the country contributions to production in November looked positive, the eurozone's industry is showing few signs of a sustained turnaround so far. The trend in production remains down and headwinds are so far not abating.

Global demand for eurozone products remains weak, inventories remain at historically high levels, new orders are not yet improving and energy-intensive sectors are struggling with the rising energy prices.

We continue to look for further rundowns of inventories before we expect new orders and production to rebound. For the moment, it looks like this is not yet happening though. There’s light at the end of the tunnel, but it’s a long tunnel that the eurozone industry is currently going through.

Source:ING Think

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Warren Takunda

Stocks

Asian shares advanced early Monday and bitcoin surged to a record high ahead of the inauguration of President-elect Donald Trump.

U.S. futures fell and oil prices were little changed. U.S. markets will be closed Monday for a holiday.

The price of bitcoin surged as high as $109,134 early Monday, up from $99,563. Cryptocurrencies have gained substantially since Trump was elected, as investors betted on his favorable comments about such assets.

Hong Kong’s Hang Seng jumped 1.8% to 19,932.80 after China’s central bank kept its key lending rates unchanged. The Shanghai Composite index edged 0.1% higher to 3,244.38.

A Hong Kong court extended a deadline for troubled property developer Country Garden to reach an agreement with its creditors until next month in the latest slow step toward recovery from a prolonged downturn in China’s real estate sector.

Sentiment also was helped by upbeat comments by U.S. and Chinese officials ahead of Trump’s inauguration later Monday. Pledges by both sides to work to improve relations may have alleviated some concerns over trade tensions that have built up as businesses brace for a possible increase in tariffs on Chinese exports to the U.S.

Tokyo’s Nikkei 225 index climbed 1.2% to 38,902.50. The dollar slipped against the Japanese yen, trading at 156.20 yen, down from 156.31 yen. Expectations are building that Japan’s central bank might raise its key interest rate in a monetary policy meeting later this week. Higher rates tend to boost the value of the yen versus the dollar.

The euro rose to $1.0312 from $1.0281.

In South Korea, the Kospi slipped 0.1% to 2,520.05. Australia’s S&P/ASX 200 rose 0.5% to 8,347.40.

Taiwan’s Taiex picked up 0.5% and India’s Sensex surged 0.7%. Bangkok’s SET gained 0.1%.

In other dealings early Monday, U.S. benchmark crude oil shed 14 cents to $77.25 per barrel and Brent crude, the international standard, gave up 23 cents to $80.56 per barrel.

On Friday, the S&P 500 climbed 1% to 5,996.66, clinching its first winning week in the last three. The Dow Jones Industrial Average rose 0.8% to 43,487.83, and the Nasdaq composite rallied 1.5% to 19,630.20.

SLB helped lead the market after the provider oilfield services delivered bigger profit and revenues for the end of 2024 than analysts expected. It jumped 6.1% after it also raised its dividend by 3.6% and said it’s returning $2.3 billion to its investors by buying back its own stock.

All the Big Tech companies in what’s come to be known as the “ Magnificent Seven ” rose: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla. Because they’re so massive in size, their movements carry more weight on the S&P 500 and other indexes than other stocks.

Such shares have been under pressure recently because of criticism their prices may have shot too high after leading the market for so many years. Such worries grew after Treasury yields jumped in the bond market. Higher yields hurt prices for all kinds of investments, particularly those seen as the most expensive.

But stocks broadly got a lift this week from an encouraging report on U.S. inflation, which raised hopes that the Federal Reserve may deliver more cuts to interest rates this year. More such cuts, which began in September, would ease the brakes off the economy and boost prices for investments, though they can also give inflation more fuel.

Wall Street has been lurching down and up in recent weeks as economic reports pushed traders to revamp their expectations about what the Fed will do with rates. Lower worries about inflation have sent Treasury yields down and stocks up, while worsening worries about inflation have triggered the opposite reaction.

Treasury yields eased sharply this past week, and the 10-year Treasury yield eased further on Friday. It’s at 4.61%, down from 4.62% late Thursday and from 4.76% a week earlier.

Truist Financial rose 5.9% Friday after joining the list of banks to report better profits for the end of 2024 than analysts expected. The company said its average deposits rose 1.5% during the quarter, and it followed bigger-than-expected profit reports from large rivals like Wells Fargo, Citigroup and others.

J.B. Hunt Transport Services dropped 7.4% for the biggest loss in the S&P 500 after falling short of analysts’ expectations for profit in the latest quarter. Higher equipment and insurance-related costs helped drag on its results.

Source: AP

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Warren Takunda

Stocks

London stocks were set to fall at the open on Monday, having a hit record high on Friday, as investors mulled the latest house price data and looked ahead to key UK jobs figures.

The FTSE 100 was called to open down around 24 points, having closed up 1.4% at a record high of 8,505.22 on Friday.

Kathleen Brooks, research director at XTB, said: "The UK labour market data for November and December are released on Tuesday. These are the first official jobs numbers since October’s budget when the government announced a £25bn tax raid on businesses that included an increase in employers’ national insurance.

"Analysts are expecting a 15k decline in payrolls for last month, which suggests that the increase in employer national insurance could be a contributing factor. Although the increase in the national living wage and the NI increase won’t come into effect until April, they may have already triggered weakness in the UK data.

"Analysts also expect pay growth to rise yet again. Average weekly earnings are expected to rise to 5.6% YoY from 5.2% in October, while average weekly earnings including bonus are expected to rise to 5.5% from 5.2%. If rising wage data is confirmed, this could weigh on Bank of England rate cut expectations, which soared last week.

"If BOE rate cut expectations are scaled back after strong wage data, we doubt that this will boost the pound, as it may see a part reversal of the recent bond market rally. Also, FTSE 100 stocks may not be impacted since they are less affected by the UK’s macro outlook and Bank of England interest rate forecasts."

Data released earlier by Rightmove showed that the average price of a property coming to market rose by 1.7% in January to £366,189 - the largest increase in prices at the start of the year since 2020.

Rightmove said a record number of early-bird new sellers have come to market since Boxing Day. This meant that buyers had the highest level of choice at the start of a year since 2015, which has also contributed to an encouraging start to 2025 buyer activity.

Colleen Babcock, property expert at Rightmove, said: "New sellers have started the year with a bang, with a record number coming to market not only on Boxing Day itself, but across the start of the year to date. We’ve also seen a strong start to the year in new seller asking prices, though given the higher-than-anticipated seller competition, we would expect this to slow down over the next few months. The record number of sellers we’re seeing is a double-edged sword.

"It’s encouraging to see so many sellers with the confidence to come to market, providing buyers with fresh choice. However, with lots of homes for buyers to consider, sellers will need to work even harder to stand out from the crowd and attract a buyer. This could be with a tempting asking price, standout home features, immaculate presentation of the home, or a combination of all of these. It’s vital that in a competitive market, sellers take on the recommendations of their agent, particularly when it comes to setting a realistic price."

In corporate news, Wood Group said it had won a contract to provide long-term maintenance for Esso’s onshore and offshore assets in Australia’s Gippsland Basin.

The company will provide maintenance services and shutdown support to optimise operational performance of offshore assets in the Bass Strait along with the Longford and Long Island Point facilities in the state of Victoria where Esso has a joint venture with Woodside Energy. No financial details were disclosed.

Elsewhere, GSK said that European regulators have expanded the usage of GSK’s Jemperli drug for endometrial cancer.

The European Commission said that, when used alongside chemotherapy, Jemperli (otherwise known as dostarlimab) can now be used to treat people with mismatch repair proficient (MMRp)/microsatellite stable (MSS) tumours, which represent approximately 75% of patients diagnosed with endometrial cancer.

Source: Sharecast

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Justin

Economic

Forex

The dollar was expected to weaken in 2024, with markets initially pricing in six or more Fed rate cuts. Reality, however, played out differently, and the dollar actually rose sharply. U.S. economic growth was more robust than expected and the disinflationary process stalled out in the second half of 2024. Consequently, the first rate cut was delayed till September and the year ended with just three Fed cuts.

Furthermore, the Trump-led Republican sweep in last November’s election led market participants to expect passage of potentially growth-enhancing fiscal measures on the regulatory and tax front. Trade tariffs and restrictive immigration policies, both of which are likely to be inflationary, are also expected to be high on the agenda of the Trump administration. Consequently, Treasury bond yields have risen sharply since the election, providing a boost to the dollar.

Early in 2025, diminished expectations for rate cuts on the back of continued U.S. economic strength and a potential revival of inflationary pressures have led many to forecast a further strengthening of the dollar. Currency traders are betting that the ‘U.S. exceptionalism’ trend (which refers to the post-pandemic outperformance of the American economy and equity markets vis-à-vis its advanced economy peers) will persist for the foreseeable future.

This creates a bit of a conundrum for the incoming Trump administration, which has repeatedly expressed a preference for a weaker U.S. dollar to limit imports and address the persistence of large U.S. trade and current account deficits.

A fundamental open-economic identity posits that, for each individual economy, the difference between total national saving (the sum of private and public sector saving) and gross domestic private investment should equal the current account balance. Simply put, a country with excess national saving will run a current account surplus and be a net foreign lender, and a country encountering a national saving shortfall will experience a current account deficit and be forced to borrow from abroad.

There is considerable debate surrounding the underlying forces responsible for the persistence of U.S. trade and current account deficits. Some have argued that the primary factor is the low level of national saving in the U.S. (often tied to the government’s tendency to frequently run large budget deficits). Proponents of this view note that tariffs are unlikely to bear much fruit if the domestic saving shortfall is not resolved. Martin Feldstein, who chaired the White House Council of Economic Advisers during President Reagan’s first term, once noted that “changes in America’s saving rate hold the key to its trade balance, as well as to its long-term level of real incomes. Blaming others won’t alter that fact.”

Meanwhile, in a recent report, Stephen Miran, the Harvard-trained economist who is expected to chair President-elect Trump’s Council of Economic Advisers, places much of the blame for the persistent trade imbalances on the rest of the world’s insatiable demand for dollar-denominated safe assets. The historical antecedent of this viewpoint is the Triffin dilemma. Robert Triffin had famously questioned the stability of the Bretton Woods arrangement by noting that the sovereign issuing the world’s reserve currency will have to run persistent balance of payment deficits in order to satisfy the rest of the world’s ever-increasing need for global liquidity.

Somewhat controversially, Miran argues that the “root of the economic imbalances lies in persistent dollar overvaluation that prevents the balancing of international trade, and this overvaluation is driven by inelastic demand for reserve assets. As global GDP grows, it becomes increasingly burdensome for the United States to finance the provision of reserve assets and the defense umbrella, as the manufacturing and tradeable sectors bear the brunt of the costs.”

It is likely that both the domestic saving shortfall in the U.S. and the global demand for dollar-denominated safe assets are factors contributing to the persistence of trade imbalances. So, what are the potential solutions?

Miran suggests that, under Trump 2.0, a radical rethink may be on the cards: “Sweeping tariffs and a shift away from strong dollar policy can have some of the broadest ramifications of any policies in decades, fundamentally reshaping the global trade and financial systems.”

Such dramatic policy shifts raise the specter of high inflation and global economic turmoil. Can modest and targeted measures help achieve a weakening of the dollar and a reduction in global imbalances?

Domestically, U.S. fiscal consolidation will help alleviate bond market concerns and lower long-dated treasury yields (and contribute to a narrowing of interest-rate differentials). Proposals to enhance government efficiency and reduce wasteful spending are good first steps. However, truly improving the long-term fiscal outlook will require tough and painful choices.

Internationally, a multilateral currency agreement akin to the 1985 Plaza Accord appears unlikely. Less ambitious measures may still bear fruit. Encouraging Bank of Japan (which no longer faces a deflation threat) to reduce its reliance on ultra-loose monetary policy will help curtail distortionary carry trade transactions. Pressuring Chinese authorities to undertake structural reforms to boost domestic consumption and reduce overcapacity will help lower that county’s trillion-dollar trade surplus. Compelling Germany and other EU countries with large trade surpluses to boost domestic investment spending would also help rebalance the global economy.

Source:Vivekanand Jayakumar

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Owen Li

Economic

Are the bond vigilantes returning?

Tax cuts are coming in the US. Yet, at this stage, the scale that will be passed by US president-elect Donald Trump’s administration is unknown. It’s likely to increase the federal budget deficit and push the federal public debt on an even higher trajectory – well into the triple digits as a share of gross domestic product over the coming years.

Investors are wary. Partly due to the US fiscal trajectory, the 10-year US Treasury bond yield has steadily risen to close to 4.70%. This is not a ‘Liz Truss’ moment of fiscal panic but there is a renewed risk that bond vigilantes will return in full force this year.

In the UK itself, the 10-year gilt yield has surpassed the level reached during former Prime Minister Liz Truss’s tenure in October 2022 to above 4.80%. This presents a headache for Chancellor Rachel Reeves who is trying to balance fiscal consolidation with a struggling economy. She may be forced to amend her half-baked fiscal plans to stick to the government’s fiscal rules or risk a further market backlash.

France faces a similar dilemma. The new, fractured government has struggled to pass a 2025 budget with the latest plans only outlining moderate fiscal consolation. In a recent speech, Banque de France Governor, François Villeroy de Galhau, outlined the need for ‘reducing budgetary and tax uncertainty, which is weighing on businesses and households’. However, it’s unclear whether there will be sustained political appetite for fiscal tightening, which could lead to further investor concerns.

Will Germany release the debt brake?

One country with fiscal room is Germany. The debt brake (‘Schuldenbremse’), which limits Germany’s structural deficits to 0.35% of GDP, has been a key fiscal anchor for the country. Its public debt-to-GDP ratio has dropped towards 60%, while other major European countries have seen it rise to over 100%. But amid stagnant growth and a broken economic model, there are growing calls for the government to loosen the purse strings.

There may be a tentative shift towards higher public spending this year. The conservative Christian Democratic Union’s Friedrich Merz is almost certain to win February’s election and has hinted that the debt brake may be loosened. But Merz is unlikely to open the floodgates for significant fiscal stimulus. In the meantime, Germany’s economy will remain in the doldrums – a topic OMFIF will explore with their finance ministry and central bank in February 2025.

Will China unleash a fiscal bazooka?

Another struggling economy with fiscal space is China. Its economic weakness prompted fresh policy stimulus in late 2024 – initially by monetary authorities and then via fiscal policy through a Rmb10tn ($1.4tn) package to allow local governments to restructure their debts. These efforts prompted a sharp turnaround in the Chinese equity market.

The authorities are gearing up for more fiscal stimulus in 2025 amid looming US tariffs and continuing structural headwinds. Vice Finance Minister Liao Min stated ‘the direction of fiscal policy in 2025 is clear, very proactive’ and that ‘we will provide strong support for economic and social development’. This may increasingly target households through subsidies for consumer goods. But China’s government remains cautious in unleashing a ‘bazooka’ such as direct handouts to consumers.

Can emerging markets escape debt troubles?

Most major EMs have weathered the various economic storms of the past five years and 2024 saw some positive news on the fiscal front. Argentina witnessed a sharp turnaround as President Javier Milei delivered a primary surplus in his first year. There was fresh optimism on South Africa as the new coalition government embarked on economic reforms, prompting S&P to improve its sovereign credit rating outlook. Elsewhere in Africa, Ghana and Zambia finalised their sovereign debt restructuring deals last year.

However, many economies are not yet out of the woods. As highlighted in OMFIF’s Absa Africa Financial Markets Index 2024, 18 of 29 countries covered are in, or at risk of, debt distress – as deemed by the International Monetary Fund. Rising global bond yields, a strong dollar and heightened geopolitical tensions are a toxic mix for many emerging and frontier economies. Meanwhile, major EMs such as Brazil, Mexico and Hungary face home-grown fiscal challenges.

Will governments embrace new solutions?

The proposed US Department of Government Efficiency may be one of Elon Musk’s new pet projects. However, it does shine a light on an important topic: how to improve the effectiveness of government spending. Solving this problem will ultimately allow governments to tackle their rising public debt while meeting the demands for greater public spending on areas such as defence, healthcare and pensions.

In a report jointly published with EY, ‘The future of public money’ highlighted the need for governments to embrace new frameworks, accounting standards and technology. Most policy-makers remain unaware or resistant to structural changes on these fronts. But as fiscal problems mount, policy-makers may be forced to embrace new innovations and solutions. The risk of inaction is rising.

Source:OMFIF

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