Kristalina Georgieva, IMF Managing Director

20 Oct 2020

IMF Insights: What a K-shaped recovery could mean for us all

A K-shaped recovery from the pandemic could see the rich get richer and the poor get poorer, say global banking executives following the recent IMF Annual General Meeting.

Talk amongst global bank executives at this year’s IMF Annual General Meeting was of a K-shaped recovery from the Covid-19 pandemic. “We've been through all letters of the alphabet; is this a V-shaped recovery, a W, an L? What we spoke about last week was potentially a K, where stronger sectors are just getting stronger and stronger and then others just weaker,” says Ruth Leas, Investec Bank's UK CEO.


Leas, along with Investec Bank SA CEO, Richard Wainwright and other executives, attended various virtual meetings with global banks during the conference and together they shared their insights with Focus.


Every year, for the past 30 years, Investec executives have used the IMF Annual General Meeting as a platform to connect with global international banks who attend this event. It’s an opportunity to gain insight into what is happening globally in the banking industry as well as get a holistic outlook at the global economic landscape.


One of the key insights the Investec team gleaned from these meetings was about the impact of a K-shaped recovery, which could really exacerbate the great divide between rich and the poor, globally. “It will become a major human problem as we move forward in time in terms of where the impact of this crisis is ultimately being felt from the human perspective,” Leas says.


The effect would also be felt in South Africa, says Wainwright: “The K-shape recovery for South Africa is a very real concern for us when we look at the macro position of South Africa. You’re seeing the more affluent parts of South Africa starting to look for opportunity, so you'll see that top part of the K there, but yet we know that we're heading towards three million unemployed people, so that is just the absolute worst case scenario for us as South Africans.”

Ruth Leas, CEO, Investec Bank, UK
Ruth Leas, CEO, Investec Bank UK

A big problem or issue that everyone is dealing with right now is very weak demand for credit so each and every bank reported that they are very asset hungry.

All global banks are in the same boat

A common theme that emerged from all the meetings that the Investec team attended is that all banks around the world are facing the same challenge: plenty of liquidity and nowhere to deploy it.


Leas explains: “A big problem or issue that everyone is dealing with right now is very weak demand for credit, so each and every bank reported that they are very asset hungry. Their revolving credit facilities were all drawn, then liquidity became more and more abundant.”


Meanwhile corporate clients are playing it safe, she says. “Corporates seem to have been looking to shore up their balance sheets, even pay back debt that they might have issued as early as March, and just putting themselves into a resilient state for anything that may come really from a second wave so to speak.”


There are similar themes in different geographies, says Wainwright. “Banks around the world right now are all experiencing the same set of facts: huge amounts of liquidity and the credit losses not coming through. So the IFRS 9 [International Financial Reporting Standard] provisions that banks have put through have been conservative. Banks are well capitalised, even the European banks, but there's massive contraction in the economy so very little growth.”

The stimulus “steroid”

Another focus of the meetings was the sheer size and pace of governments’ stimulus packages and how these would impact global growth in the future.


“One of the bank's pointed out to us that the size of the QE, Quantitative Easing, compared to the global financial crisis in '08/'09. The QE this time around has been two and a half times the size of that QE, which is just absolutely ginormous and that's the reason for the huge amount of liquidity that we’re seeing. How we get off that steroid is going to be interesting over the coming years,” says Wainwright.


“I remember waiting back in '07/'08/'09 – we would wait weeks to see what the outcome of the deliberations of various governments would be – whereas this time they’ve been really bold, fast and asset prices are dizzy, but with interest rates this low, there’s a real disconnect between Main Street and Wall Street," adds Leas. “It doesn't look like interest rates are going up anytime soon. If anything, we're going negative.” 

Richard Wainwright Investec Bank CEO
Richard Wainwright, CEO, Investec Bank SA

My personal view on American elections is that the no matter who wins overall, the impact on the economy is actually not that severe. In this case, I have a different view because I think you've had this polarisation.

Negative interest rates

The threat of negative interest rates in some developed economies, including the UK, looms large. Leas says that “Dear CEO” letters have been sent out to UK banks asking about their preparedness for negative interest rates. “A number of questions have gone out to the banks to assess whether they're in shape to be able to cope with negative rates. This means that the central bank is at least thinking about this, albeit not yet ready to pull the trigger on it.”


This is not the case in South Africa, says Wainwright, where the SARB has not had the fiscal space to administer large amounts of QE life support. “We've done a little bit. You've seen the Reserve Bank supporting the bond market and we've seen the President's stimulus package, but we don't have a lot of room.”


“I can't see them increasing interest rates because I don't think there's inflation, not domestically or internationally, so lower rates. I don't think we will get down to where the UK are at negative, our repo rate is 3.5 so we’ll probably stay there for quite some time until we start seeing investment in the real economy.”


Unlike the developed economies, South Africa’s government does not have the same eye-watering sums to parachute in and fire up the economy to create demand in this “real economy” Wainwright speaks of. “Liquidity is strong in South Africa because of the lack of credit demand and the flight to safety, so to speak, from an investor's point of view; but we're not getting the stimulus.”


With this lack of funds, how does the country stimulate the economy? According to Wainwright, the solution lies in three key areas: “We've got to be led by business confidence and infrastructure spend and we've got [to fight] corruption which we seem to be on the front foot with right now which may hopefully bring improved business confidence.”

US elections could impact financial markets

While previous US elections might not have significantly moved markets, Wainwright believes that the extreme polarisation of the left and right could have a short-term impact this time around: “My view on American elections is that the no matter who wins overall, the impact on the economy is actually not that severe.


"In this case, I have a different view because I think you've had this polarisation. You've got Biden who is more left than centre and clearly Trump is more right than centre. So, you do have quite a big swing. So, I actually think this election could impact what happens in the financial markets and then longer term maybe in the real economies, though less so.”

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