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The author is the chairman of Rockefeller International
An epic collision is about to occur in 2024. In an election boom year with nationwide contests from the United States to India, incumbents seeking re-election will be tempted to increase public spending as usual before voting. This puts them on a collision course with global bond vigilantes who will be awakened from their long slumber by a new era of high interest rates and immediately punish profligate politicians.
As I noted earlier this year, the vote in more than 30 countries gave a voice to two out of three adults in the democratic world, a record since data collection began in the early 1960s. It was the number of votes. This historic celebration of democracy will be an opportunity for political parties to indulge in their usual pre-election splurge tactics. But if money flows too freely, a new group of vigilant vigilantes will emerge to spoil the fun and sell off the nation’s bonds and currency. Many governments, which have taken on huge debts during the pandemic, are now particularly vulnerable to such attacks.
Conflicts are most likely to occur in countries whose leaders are under the most pressure to increase spending because their popularity is so low. Unfortunately, that’s most countries. I track public opinion polls in 10 developed and 10 developing countries. Over the past year, approval ratings have declined in three out of four countries, with the median approval rating in developing countries standing at just 45%, and in the 10 developed countries, it is near an all-time low of 36%.
Bond vigilantes are usually triggered by inflation, but they will also act quickly in countries where liberal spending leaders are exacerbating a bad fiscal situation. The six leaders are in countries where budget deficits have been steadily increasing and are currently above 5% of gross domestic product (GDP), which many bond investors would consider dangerous waters, by 2024. The election will be held in 2020. Ranging from India and Bangladesh to South Africa and the United States, the deficit has nearly doubled from pre-pandemic trends to about 6% of GDP, the largest deficit among major advanced economies.
South Africa is also at high risk. The candidate for re-election is running an unpopular but growing deficit, and most of the national debt (25%) is held by foreigners. Faced with power outages and rising inflation, President Cyril Ramaphosa’s approval rating fell by nearly 10 points last year to just over 40%, and the country’s budget deficit has tripled since the 2000s to more than 5%. Recent steps to rein in spending have shifted spending to targets likely to please voters, such as raising civil servant wages, and the public debt remains rising.
India’s risks are partially offset by the fact that its economic growth rate is high and it has demonstrated fiscal restraint throughout the pandemic. But many state leaders have recently engaged in a competitive populism game. If Prime Minister Narendra Modi’s party falls behind in state polls this month, he may feel forced to increase spending on his popular policies.
Meanwhile, Mexico’s deficit is rising rapidly toward 5% of GDP, the highest since the 1990s, and popular President Andres Manuel López Obrador has left the problem untested. I’m trying to get someone to take over. Several frontier economies, from Ghana to Sri Lanka, have faced bankruptcy and been forced to cut spending in recent years, but their leaders have found it increasingly difficult to stay the course in an election year. It will be.
No country is unaffected. Research shows that dating back to at least 1960, leaders often increased spending or cut taxes to improve their chances of being re-elected. In recent decades, they have tended to get away with it. Borrowing costs were so low throughout the 2010s that bond investors turned a blind eye, except in extreme cases like Argentina.
Things changed in 2022 as inflation returned and interest rates rose. Since then, vigilante groups have targeted countries around the world. They helped force British Prime Minister Liz Truss out of office by selling British government bonds and currency in response to budget-crushing tax policies. They forced fiscal restraint on two old populist warhorses, Turkey’s Recep Tayyip Erdoğan and Brazil’s Luiz Inacio Lula da Silva. President Erdogan has shelved his wildly unconventional policies and appointed financial market veterans to restore investor confidence.
Notice the pattern. Because financial markets are now so large that they are smaller than any national economy, vigilante groups usually dominate. Leaders undertake them at their own risk. While there is a lot of complacency in the US, and many seem to believe that global investors will never tire of buying US Treasuries, it is worth pondering the fate of the losers. Brazil, Turkey and the UK have changed their wayward ways under vigilante pressure and so far are doing much better. The fight against debt vigilantes is largely a losing battle, but that won’t stop more politicians from trying.