INSOL International, Tokyo: navigating the new global economic order in era of rapid change

The era of zero interest rates, during which debt has skyrocketed and asset prices have ballooned, is gone – and it’s never coming back. A panel of economists and bankers at INSOL International’s annual conference in Tokyo said the future looks turbulent without an acceleration in workforce productivity, as they advised insolvency practitioners to keep up with the new global economic order.

Standard & Poor’s chief Asia economist Luis Kuijs, Asian Development Bank chief economist Albert Park, and McKinsey & Company’s senior partner Pedro Rodeia shared their insights at INSOL Tokyo 2023 on 12 September.

News anchor Yuko Fukushima of Japanese public media organisation NHK World moderated the panel, in which the experts warned attendees that they should try to ascertain the structural impacts that new technologies will have on the way consumers behave when planning restructurings in the future, and reshape debtors' assets accordingly.

Doing that, rather than just completing a financial restructuring to kick the can down the road and “postpone the sustainable path” will make a huge difference, not just for the companies they advise, but also for society and the world, the panel said.

Today's “dynamic world” presents a lot of changes and opportunities that restructuring professionals need to keep up with, the trio added, because when businesses face a lot of challenges they become very cautious – and if restructuring professionals limit their roles to just reducing risk, nobody will make any money going forward.

The panel followed opening remarks from INSOL International’s president Scott Atkins, who said the implementation of INSOL’s 2030 strategic plan had “rapidly advanced” with the announcement of two new regional advisory councils and a soon-to-be-launched ThinkTank. 

High interest rates are here to stay

Kicking off the panel with a presentation, Kuijs set the scene for most global economies: central banks have in recent times had the difficult job of bringing down inflation through higher interest rates, which has unfortunately had the effect of calming down economic momentum, he said.

“We are at the moment in a relatively weak spot in the global trade cycle and these forces have been weighing on growth,” Kuijs noted. But there hasn’t been a significant downturn yet even though “these forces have been painful in the economy”.

Kuijs said the US has been holding up remarkably well because of its domestic resilience in the service sector. That resilience translated to the global labour market, with the most recent job reports in the US, Eurozone and Japan showing that unemployment did not rise significantly in any advanced economy.

He said his team at Standard & Poor’s still expected a slowdown in the US economy later in the year or early in 2024, even though it “keeps surprising us with stronger than expected economic momentum”. Nevertheless, a “soft landing” slowdown seemed likely, with the Federal Reserve bringing inflationary pressures down without a significant downturn.

Kuijs predicted the US will likely have reined-in inflation in three years’ time, but that did not mean interest rates would go back to zero. “The days of zero interest rates are gone,” he said.

Despite weaker economic activity and higher inflation than the US, Europe was also not seeing sharp downturns, Kuijs said, though the strong labour market was causing headaches for European central banks where workers have demanded compensation in line with the high inflation, making the latter harder to control.

“We are really not yet out of the woods in Europe on this difficult battle to engineer that soft landing,” he noted.

Turning to INSOL host Japan, Kuijs explained that the country had its own narrative where the Bank of Japan has never increased interest rates. But he said the time was nearing where its central bank would make some “very modest adjustments”.

Fukushima asked Park what impact the US Federal Reserve’s policy rates were having on Asian economies? He explained that before the covid pandemic and subsequent inflation crisis, Asian economies were well-managed in terms of macroeconomics and a lot of the vulnerabilities associated with rapid capital flight were avoided.

While a lot of countries in the region did raise interest rates to match what the Federal Reserve was doing, the recent trend is that central banks are either holding rates steady or cutting them as inflation is coming down, he said.

Nevertheless, Park predicted the higher interest rate environment in Asia could lead to more corporate debt defaults on bond obligations.

Fukushima then asked Rodeia what the new high interest rate environment meant for banks and private companies.

He said the higher interest rates are “a mixed blessing” for banks because they improve margins and make deposits profitable – but he warned that credit quality could deteriorate if high interest rate persists for a long time.

Rodeia predicted that institutions with very good quality underwriting and recovery as well as solid capital and liquidity positions will do fine, while others may experience a bit more stress.

Meanwhile, non-financial companies that entered the new high interest environment with robust balance sheets, supply chain flexibility and solid operating performance are more likely to do well and could even improve their performance, while those that entered very leveraged, particularly with very leveraged real estate investments, will find it more painful and may need to restructure.

Asked whether another collapse like Silicon Valley Bank could occur if interest rates remained high, Park explained that that Asian Development Bank was monitoring the issues that started the banking turmoil in the US earlier this year. But he said most of the data suggested both the US and Asian banking systems had weathered the storm pretty well and there wasn’t a high probability of the turmoil spreading.

Despite the unprecedented rise in interest rates, Park said there seemed to be confidence in banking systems. “There is no real strong evidence of this spinning out of control, but still definitely worth closely monitoring,” he added.

Rodeia pointed out that the global financial system is “now more capitalised than it ever was” and said its resilience was strong.

Kuijs agreed that the global banking system tended to be better capitalised than 15 years ago, but advised banking regulators to look at who the bank clients are. “The speed with which people withdrew their money from SVB was quite striking, which was new compared to the global financial crisis and it’s worth keeping in mind,” Kuijs said.

Asian outlook

Focus on the Asia region, Park said in his own presentation following Kuijs’, that the Asian Development Bank’s outlook for Asia was relatively upbeat, with resilient growth of nearly 5% in 2023, driven by robust and healthy domestic demand and healthy investment following a steady recovery from the pandemic.

But he said the state of the Chinese economy was concerning, particularly its property sector where economists were predicting an asset bubble that could pull China into a low growth period or a long recession.

Park explained there was overinvestment in the Chinese housing market because local governments relied on property sector investments to generate revenue to support many of their programs.

Regardless, he noted that China’s economy was not contracting at the moment and there were optimistic indicators where consumption levels and income were growing pretty robustly.

Noting a sharp bounce in consumer mobility after China left its tough lockdown policy at the beginning of the year, he explained that manufacturing services and construction had struggled to sustain the recovery level of other industries. But he said there was scope for recovery in China if consumers regained confidence and income continued to grow.

Long term, he noted there were structural issues for the Chinese economy as a result of demographic changes because of its ageing society. China also has to deal with a productivity slowdown that started even before the pandemic, he added.

Asked about debt in Asia, Park also said sovereign debt in the region increased from 42% to 51% after the pandemic, which had had a “huge effect” on investors and consumers.

He singled out Sri Lanka, Pakistan and Laos, noting they all had macroeconomic management issues before the pandemic and faced debt sustainability challenges with the new inflationary pressures. But Park said those challenges would not cascade to other Asian countries because they had managed their debt well. 

When asked about what impact higher debt levels would have in the US and Europe, Kuijs predicted that the battle over how global governments finance the servicing of sovereign debt is going to become quite intense in the coming decade.

“Companies have to make sure not to be surprised by political changes that take place as governments try to square the circle somehow between modest growth and fairly high taxes,” he said.

He also observed that most governments in the Asia–Pacific region were “fairly conservative” in terms of how far they stretched their debt levels compared to Europe and the US.

Deglobalisation issues and resilience

In his presentation, Park also looked at US-China geopolitical tensions, which he said had given rise to a lot of talk about deglobalisation, decoupling and de-risking.

Despite concerns about polarisation, he said there was actually evidence of deepening regional economic integration within Asia, which the Asia Development Bank had always promoted.

“A better path for economies in Asia at least is to try to deepen regional economic integration through institutional frameworks to hopefully mitigate to some extent the impact of the broader geopolitical deglobalization trends,” Park said.

If the US and China really asked countries to choose sides, those that would get hurt the most would be the small countries whose competitiveness would decline dramatically, he said.

Park also expressed his pessimism that US-China tensions would disappear any time soon, saying there were strong – although perhaps not strategic – anti-China policies in the US that had hurt the second largest economy in the world “in a very blunt way”.

“I don’t know how far that mentality goes but I’m not optimistic it will reverse,” he said. 

Kuijs noted that companies that are more dependent on either the US or China will probably align with that side, while those that are genuinely global will need to play a very delicate balance between them to keep an objective dialogue with both. The latter will also need to make their operating, financial and IT models more resilient to withstand geopolitical shocks if there is an East-West split, he said.

Fukushima asked the panel what companies can do to remain resilient in the current high-tension geopolitical atmosphere? Rodeia said they have to stay closer to consumers and be able to operate through trade route disruptions.

Another key factor in company resilience is making sure the business’ technology can resist cyber-attacks so it can continue operate if it faces disruptions in a certain geography, Rodeia said, as well as financial resilience to withstand shocks if certain funds are locked.  

Agreeing, Kuijs said all those steps were going to take money and be easier for big companies. He noted that these pressures made it harder for small and medium-sized enterprises to leverage markets abroad.

Park noted that companies with global supply chains were the most resilient to big shocks during the pandemic because they had support from their suppliers and customers, and they recovered much faster.

He said that growth in the digital services trade had created opportunities and really strong efficiency gains, even for smaller enterprises.

Preparing more resilient supply chains, contingency plans and some diversification should be balanced against efficiency, he added.

“I don’t think the answer for any company should be withdrawing from the global trading system because that’s where all the opportunities are,” Park said.

Rodeia said he was surprised that the panel had only focussed on China at a time when there is “a lot of tailwinds and ambition” coming from India as well. He said that when a country grows fast, there are often restructuring opportunities for renewing the economy into a sustainable future, with which Kuijs agreed.

Park also agreed that India was going to see the highest rates of growth in South Asia in the future, which would drive the region forward.

But he said India faced challenges in its education sector and argued that its protectionist stance harmed business competitiveness.

Midterm pressures and long-term trend

Rodeia took the stage next for his own presentation, based on a report named “Global Balance Sheet: The Future of Wealth and Growth Hangs in the Balance”, in which he explained how the age of very low interest rates and economic stimulus ended in a savings glut. During that time, instead of going towards productive investment, cash mostly went to buy assets, inflating their price and leading to each dollar of investment creating US$1.9 in debt, he said.

Rodeia explained that global debt owed by public and private debtors had hit more than US$306 trillion over that period, which didn’t seem like a problem when looked at as a percentage of global GDP and helped by inflation. But he said the debt could turn into a problem with increasing interest rates, even if it seemed “quite manageable when money was close to free”.

He said that mature markets which had increased interest rates more dramatically may suffer more, but emerging markets were also not off the hook because of the significant redemption schedules for the next three years.

Rodeia set up four possible economic scenarios for the future.

In the first, the world economy would mostly ping back to where it was in the last decade with low interest rates and savings chasing assets, further inflating their prices. “The problem is that it’s not just elusive but at some point, it’s unsustainable,” he said of the first view.

A second possibility is that interest rates will remain higher for longer, meaning low growth along with some decline in wealth globally.

The third and worst-case scenario, Rodeia said, is for a significant balance sheet reset. If the “inflation game on assets” runs for a long time, “at some point a correction is inevitable,” he said.

The only really positive scenario, and the best way out of the current situation, is the fourth way, productivity acceleration, Rodeia said – meaning more sustainable growth, inflation staying a bit over historical patterns yet at controllable levels and more sustained wealth creation.

He shared the outcomes of a piece of research conducted by McKinsey in which it asked almost 1,000 executives what they expected from the future. Those in Europe and the US said higher interest rates for longer or a significant balance sheet reset were the most likely scenarios. But in Asia, executives said productivity acceleration was most likely.

Either way, Rodeia predicted there would be more opportunities for restructuring professionals arising from the US$306 trillion in debt worldwide. He advised attendees to think about operational restructurings as well as financial ones, because “postponing the sustainable debt down the road could end up on a destination worse than the current one”.

Rodeia also noted that the divide between the strongest and most resilient companies and the rest had grown since the global financial crisis. “When water is high, almost everyone does well, but now we will see very significant differences,” he noted.

But Park had different expectations for Asia, which he said was “getting back to normal”. “Bad news for restructuring professionals,” he said.

Unlock unlimited access to all Global Restructuring Review content