In this edition of The Interview, Fair Observer talks to the executive managing director of the Institute of International Finance, Hung Tran. 

With President Donald Trump’s threat to withdraw from the North American Free Trade Agreement (NAFTA) still on course, key industry groups such as the US Chamber of Commerce have expressed their opposition and warned that the move would be bad for business. Having entered the round of talks on January 29th, the conclusion of the NAFTA negotiations is still uncertain, creating a major source of concern for businesses and trade stakeholders across America.

Simultaneously, the US is facing an emerging economic risk of retaliatory practices from China and Europe, in response to restrictive trade measures that the Trump administration has threatened to impose against them. Economists and political analysts in Washington criticize President Trump for protectionist policies, and this criticism grows along with major concerns for his budgetary policy and recent tax reform that is predicted to add $1.5 trillion to the US public debt over the next decade.

But the US is not alone in its worry about debt and deficit. According to the International Institute of Finance statistics, China poses the biggest threat to global economic stability, its total debt having risen astronomically over the last decade. The eurozone is still trying to heal the scars of an enduring economic crisis, with Greece’s unmanageable debt remaining a significant problem. Europe’s slow pace in implementing decisions and enacting reforms has always been a destabilizing factor for the union.

In this edition of The Interview, Fair Observer talks to Hung Tran, the executive managing director of the Institute of International Finance, about the prospects for the global economy in 2018.

Athanasios Dimadis: What are the most significant political risks in 2018 you highlight for the developed economies and the US economy?

Hung Tran: Besides the geopolitical tension, the key political risk this year is rising trade friction as protectionist measures from the US — in addition to measures on solar panels and washing machines, there will be steps on aluminum, steel and intellectual property — meet with possible retaliatory moves by other countries, especially China. In addition to trade measures, the US is strengthening the process to screen inward direct investment projects by expanding the Committee on Foreign Investments in the US. This can slow the growth of world trade and foreign direct investments, hurting the prospects of the global economic recovery.

Dimadis: Simultaneously, many investors have been looking for gains and opportunities in emerging markets. Do you expect this trend to continue this year?

Tran: Emerging markets have had a good performance and attracted strong non-resident capital flow last year. Such inflows to emerging markets have accelerated so far this year, as the relative undervaluation of emerging market assets versus millions of dollars in assets (specifically equities and bonds) and stronger growth in emerging markets continue to support emerging financial markets and attracting inflows this year.

Dimadis: According to the Institute of International Finance, global debt hit an all-time high of $233 trillion in 2017. China’s total debt to GDP has risen at one of the fastest rates in the world over the past decade, from under 175% of GDP to nearly 300%. What are the risks generated from the current state of Chinese deleveraging?

Tran:  The record volume of global debt, rising very quickly over the past decade, represents a source of headwind to growth as the necessary deleveraging occurs. In addition, high debt increases debt servicing difficulty, especially for weak sovereign and corporate borrowers, as interest rates start to rise. China is likely to engineer a soft landing combining gradual deleveraging and less ambitious growth objectives.

Dimadis: What is the reason the global debt hit an all-time high? How worried should we be about it?

Tran: Very low-interest rates and plentiful of central bank liquidity have led to a significant increase in debt. In particular, the search for yield has supported the growth of high-yield bond issuance. Besides becoming a headwind to future growth, very high levels of debt, especially by a weak sovereign and corporate borrowers, will create serious debt servicing problems for them as interest rates rise.

Dimadis: How can governments be averted from over-borrowing and running into a funding crisis, particularly in countries where corruption is rife? How confident are you that in the future we won’t see other debt crises similar to what happened in Greece in 2010?

Tran: The main tool is full disclosure by the sovereign debtor, supplemented by International Monetary Fund and World Bank data on the country’s sustainable debt limits as well as full transparency in the process of incurring debt. With full transparency, market participants can price sovereign risks more accurately, and international financial institutions such as the IMF can caution the government if its debt exceeds sustainable levels.

Dimadis: You recently expressed the view that there is a clear sense of hope that has emerged in Europe after years of stagnation, crises and now Brexit. Where is this optimism coming from?

Tran: The cyclical recovery in Europe has accelerated and spread out across countries and sectors, thus creating a window of opportunity for Europe to reform and improve its economic resiliency and performance. European leaders have indicated their intention to move forward, energized to a large extent by President Macron’s ambitious proposals.

Dimadis: Would you characterize this emerging recovery of the eurozone as fragile, or is it more stable than it appears to be? What is this regeneration in the eurozone dependent on?

Tran: Europe’s recovery mainly results from significant monetary accommodation and a fiscal stance which had turned neutral, then modestly positive, over the past two years. As such, the recovery is still cyclical in nature and needs to be reinforced with reform measures to enhance its resiliency. Specifically, Europe needs to construct a productive framework for a relationship with the UK after Brexit, to complete the banking union and capital markets union, and to improve the functioning of EU institutions to regain the trust and confidence of voters.

Dimadis: What is your projection for Greece? Is the country emerging from the crisis?

Tran: Greek economy has recovered by 1.4% last year and expected to grow by a touch above 2% in 2018, with government budget in balance and current account in a small surplus (of around 0.4% of GDP). Greece is finishing negotiations with its official creditors to exit the adjustment program. With improved prospects and an upgrade by Standard & Poor’s to B from B-, Greece plans to issue an international bond of €3 billion ($3.7 billion) next month. So we can talk about the post-crisis era of the country, provided the reforms put in place during the program are maintained, and the European creditors deliver on their debt relief promises.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

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