Citi Global Head of Public Sector Group Julie Monaco joins Yahoo Finance's Andy Serwer at the 2022 World Economic Forum (WEF) in Davos, Switzerland, to discuss the state of the market, emerging markets, inflation, and the outlook for global economy.
- Welcome back. And time to get back to the World Economic Forum in Davos, where Yahoo Finance's Editor in Chief, Andy Serwer, spoke to Julie Monaco, who is the Global Head of the Public Sector Group at Citigroup. And they're talking about all the challenges for emerging markets, and also the state of the global economy. Let's take a listen.
JULIE MONACO: So our group sits within the banking capital markets and advisory group. And I'm the Global Industry Head for governments and sovereign clients. So my team of bankers around the world is responsible for covering sovereigns as clients and understanding the financial services that Citi can provide to them, and solutions that we can provide to them.
ANDY SERWER: So obviously, we've had the pandemic, and a lot of issues globally for sovereigns and nations. What countries, and how did they respond-- what countries responded best? Or how did the countries that respond best fair?
JULIE MONACO: Yeah, so I think overall the response to the pandemic was very well coordinated. When you saw in March of 2020, there was massive fiscal response, as well as monetary response across the world. And I think that thata was needed. I mean, people say, should the fiscal response been as strong, as that's what's driving inflation? I think that the fiscal response was the right thing at the time.
And I think that you have to differentiate between the countries. Because when you look at it, the fiscal response in the developing countries, obviously, it's a larger percentage of their GDP. But it was small compared to what the developed countries had as a fiscal response, because they had more room in their fiscal budgets to do so.
ANDY SERWER: Is there a way to generalize, Julie, about what kind of shape the emerging markets are in right now?
JULIE MONACO: Right, well, the emerging markets are challenged right now for a few reasons. And you have to go back and even look at before the pandemic. There was a loose monetary environment for 10 years with low rates that allowed the emerging markets to increase their debt to GDP ratio by about 23%, leading into the pandemic.
ANDY SERWER: This helicopter here. Go ahead.
JULIE MONACO: And then the pandemic happened. And during the pandemic, you had a significant increase in that debt to GDP ratio. So we ended 2020, started 2021 with the highest global debt to GDP ratio in the world since the end of World War II. And you know, the larger percentage of that debt increase happened in the developed market.
But the increase in the developing markets took a lot of sovereigns to a risk point, right? So the United Nations will say that there's 44 of them of the most challenged countries financially, the poorest countries in the world that are now in a position where debt sustainability may be a challenge. And so then on top of that, you now have a war, which actually further exacerbated the problems with emerging markets debt.
So now, you have a situation where we have a supply shock. We have inflation. We have increased costs of commodities. And depending on whether you're an exporter or importer of commodities determines how much that's going to impact your fiscal, as well as your ability to sustain your debt.
ANDY SERWER: So let's drill down a little bit into inflation. Because as you suggest, you've got supply issues and demand issues. And there's a controversy out there. Larry Summer is on one side. Some other economists are on the other side. In terms of what is actually driving inflation more, demand or supply problems?
JULIE MONACO: Yeah, I think last year at this time everybody was talking about transitory inflation, because the assumption was there was pent up demand, right? And that when the supply chains readjusted, that eventually, the inflation was going to come down. There are certainly arguments that maybe in the developed world, they were too slow to take actions for contracting on the monetary side, as well as maybe they extended the fiscal spending a little bit too much.
I think history, hindsight is always 20-20. So historically, we'll look back and see whether that's true. But obviously, now, we have a huge supply shock with what's going on with the war. So that exasperated things. And I think that what we have on the commodity side, and energy, and food, and other types of minerals, and the supply shock also with what's going on in China in terms of the continued lockdown.
We have to remind people all the time, this pandemic is not over. And certainly, in China, it's very disruptive to the supply chains. So there certainly is a view that the inflation is very supply chain oriented, but there's also that view that may be developed countries should have moved faster in terms of the monetary actions. And that now because the inflation is the highest it's been in 40 years in a lot of countries, that it's going to require very strong action in terms of monetary. And then of course, now, the debate is how to get that right in terms of the balancing act, in terms of having a soft landing and not creating a recession. So it's not an easy question to answer.
ANDY SERWER: And final question, Julie, what about the dollar appreciating strongly, and how does that impact your clients and sovereigns around the world?
JULIE MONACO: Well, we saw this cycle coming, right? Obviously, there was going to be an end to this sort of easing of monetary policy. And once the contraction happened, and they started raising rates in the developed countries, you were going to start seeing an appreciating dollar, and the interest rates going up, and assets moving out of the developing countries.
And there was so many assets moving. There was so much dollar liquidity. And the rates were so low in the developed world that you had such a huge demand for rate return. And that money went into the emerging markets. So now, in this environment, obviously, this is challenging, the sovereign countries.
We, three years ago started working with the development banks around the world, and coming up with a solution around de- dollarizing a lot of the debt. A lot of the loans that development banks due to sovereigns in the emerging markets are done in US dollars. And we came up with a product and a solution that helped de-dollarize that debt to prepare for this. And we're working with them on more solutions to help get them through this.