What Are the '12 Downside Risks' Identified by Overseas Think Tanks and IBs in 2021?

Prolonged Pandemic and Uncertainty of Stimulus Policies
Debt Crisis from Emerging Markets, Zombie Economy, and Aftereffects of Stimulus

Western Leadership, US-China Relations, North Korean Provocation Risks, and Interstate Conflicts
Climate Anomalies and Cyber Disaster Risks Also Cited as Threat Factors

[Asia Economy Reporter Kim Eunbyeol] As the COVID-19 pandemic continues for over a year, what risks are overseas think tanks and investment banks (IB) concerned about? The International Finance Center summarized 12 downside risks to the global economy in 2021 in its report titled 'Top 12 Global Risks in 2021 According to Overseas Analytical Institutions.'

Lee Sangwon, Deputy Specialist at the International Finance Center, stated, "Although the global economy in 2021 is expected to rebound by 4-5% from a deep V-shaped recession thanks to vaccine commercialization and economic stimulus measures, the consensus is that downside risks prevail. In the mid to long term, issues such as the surge in debt and worsening inequality, which are legacies of the pandemic crisis, are emphasized as potential obstacles to the global economy."

The foremost risk identified is directly related to COVID-19. Concerns include the rapid spread of COVID-19 variants or slower-than-expected vaccine procurement, which could delay recovery in consumption and the service sector. Forbes, Allianz, and Charles Schwab cited this as a risk. The International Monetary Fund (IMF) and the Atlantic Council noted, "Even if vaccines are widely distributed, risks such as vaccine hesitancy, shorter-than-expected immunity duration, and slow development of treatments remain." Bloomberg estimated that at the current vaccination pace, it would take seven years for the global population to reach herd immunity.

There is also concern that if the intensity of monetary and fiscal stimulus weakens faster than expected during the recovery from the pandemic shock, it could negatively impact economic agents and financial markets. Additionally, applying strict lending standards to financial institutions could exacerbate funding difficulties for small and medium-sized enterprises, increasing the risk of bankruptcies.

With Joe Biden elected as U.S. President, there are concerns that the Democratic Party's push to strengthen big tech regulations and raise taxes on corporations and high-income earners could cause a sharp decline in tech stocks and trigger a surge in U.S. Treasury yields.

There is also a risk that the increased debt accumulated in response to COVID-19 could trigger a debt crisis originating from emerging markets. Standard Chartered (SC) warned that if emerging market sovereign credit ratings are downgraded consecutively, stock markets could plunge by 30%. The Institute of International Finance (IIF) estimated that emerging markets will need to repay $7 trillion in debt by the end of this year.

The World Bank (WB) and JP Morgan noted that government support for zombie companies (marginal firms) might be used more for debt repayment than for productive purposes such as employment and capital investment, negatively affecting growth. Zombie companies are defined as firms that have failed to cover interest expenses with operating profits for three consecutive years. Particularly in Europe, the increase in zombie companies is analyzed to weaken productivity and delay the recovery of the banking sector.

Abundant liquidity flowing massively into real assets such as copper and housing could increase vulnerabilities in asset markets. Institutions also pointed out that if the real estate market turns bearish under these conditions, defaults in related industries could rise, leading to deterioration in banks' asset quality.

Political turmoil in major countries or conflicts between nations are also downside risks. Uncertainties include German Chancellor Angela Merkel's expected retirement around September this year, how much support U.S. President Biden can garner from the Republican Party, uncertainties in U.S.-China relations, and the possibility of hardline conservatives coming to power in Iran's June presidential election. Turkey's pursuit of a neo-Ottoman empire and its diplomatic adventurism, as well as North Korea potentially conducting military provocations to test the new U.S. administration, were also reported as possibilities.

Other major risks mentioned include increased exposure to various climate change events, cyberattacks, and technological disruptions that threaten future growth.

This content was produced with the assistance of AI translation services.