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The Influence of Political Stability on Fiscal Space Amidst Climate Risks
Climate risks have a profound impact on fiscal space, with sovereign bond yields and debt ratings serving as indicators of the financial challenges. The role of political stability and financial development in reducing these risks is pivotal, highlighting their significance for fiscal sustainability in the long run. Climate risks, encompassing the potential negative socio-economic consequences of climate change, pose considerable fiscal threats, particularly through their impact on fiscal space. For instance, a major disaster triggered by climate change could require substantial fiscal expenditures for relief and recovery efforts. Similarly, extreme heat due to global warming might lead to significant agricultural damage, prompting governments to offer subsidies to affected farmers. Broadly, public spending on climate change adaptation and mitigation stands as one of the largest fiscal demands globally. Combined with other significant fiscal demands, such as those stemming from an aging population, climate change-related fiscal expenditures pose a substantial threat to fiscal space and sustainability in the future. A recently published ADB Economics Working Paper analyzes the effect of climate risk on fiscal space across 199 countries from 1990 to 2022. We measure fiscal space using sovereign bond yields and ratings on foreign currency long-term sovereign debt. Elevated sovereign bond yields and downgraded sovereign debt ratings signal higher borrowing costs and default risks, indicating a deterioration in fiscal space. We also explore the mitigating role of political stability and financial development in climate-related fiscal risks. Specifically, we assess whether more politically stable and financially developed economies are less susceptible to these risks. Political stability is likely to reduce these risks as it increases the probability of more sustainable fiscal policies, such as a robust medium-term fiscal framework. Consequently, a more stable political environment is likely to lessen the impact of climate shocks and other shocks on fiscal sustainability. Moreover, political stability fosters more cautious, rational, and cost-effective government planning in response to potential climate shocks, helping to preserve fiscal space. Financial development is also anticipated to reduce climate-related fiscal risks. In financially developed economies, businesses and households have access to insurance and other financial instruments that protect them from the adverse effects of climate shocks. This reduces the need for substantial fiscal outlays, thereby mitigating the negative impact on fiscal space. Additionally, financial development increases the credit available to businesses and households to help them absorb the effects of potential climate shocks. Our findings reveal that a one-unit increase in climate vulnerability results in a significant one percentage point increase in bond yields in countries with high political stability risks, peaking at 2 years post the initial impact. Conversely, in countries with lower political stability risks, the response of bond yields is not statistically significant. In the case of financial development, economies with low financial development are more vulnerable to climate-related sovereign risks. Bond yields rise by approximately 0.6 percentage points for these economies, peaking at 2 years post the initial climate shock. Meanwhile, in economies with high financial development, no significant effect is observed. Overall, our empirical analysis indicates that climate vulnerability negatively affects fiscal space, with the most pronounced effects in countries most susceptible to climate change and where fiscal space is most limited. We also find that these effects are reduced in countries with more stable political environments and more developed financial markets. More specifically, our evidence shows that climate risks are associated with lower bond risk premiums and higher sovereign ratings in countries with less exposure to both external and internal conflict. Furthermore, better financial development weakens the link between climate risks and fiscal space. Financially developed countries do not experience a climate-related bond risk premium or a persistent decline in sovereign ratings due to climate vulnerability. While fiscal consolidation is crucial for mitigating the adverse effects of climate risks on fiscal space, our results suggest that political stability and financial development can also contribute. Political stability is valuable in its own right, but our analysis provides evidence of a significant additional benefit in protecting fiscal space from climate risk. Similarly, our findings reinforce the argument for governments to promote financial development further.
Strong Institutions Shield Emerging Markets from US Monetary Shocks
The global impact of US monetary policy significantly affects capital flows and credit growth in emerging markets, highlighting the importance of macroeconomic fundamentals and institutional quality in determining resilience during different monetary cycles. The United States dollar continues to reign supreme. The dollar dominates international trade and financial transactions, and the foreign exchange reserves of central banks. As such, US monetary policy still drives global financial cycles, impacting global capital flows and credit growth. Dollar dominance ultimately limits the policy choices of financially integrated emerging markets. The global influence of US monetary policy was especially visible during the seven years of easing (2007–2014) induced by the global financial crisis and its aftermath. This was followed by 4.5 years of tightening that was kicked off by the 2013 “taper tantrum.” Subsequently, three years of easing (2019–2022), largely induced by the COVID-19 pandemic, eventually led to a major tightening beginning in February 2022 as a delayed reaction to rapidly rising inflation in the US. As US monetary policy shifts have global repercussions, capital markets in emerging economies are often vulnerable to destabilizing flight-to-quality outflows during periods of heightened uncertainty. They are also vulnerable to volatile search-for-yield inflows during periods of low returns in the US. Large inflows were observed when the Federal Reserve's massive monetary easing pushed the federal funds rate close to zero in the wake of the global financial crisis. At a broader level, these episodes placed increasing pressure on the macroeconomic outlook of emerging markets and raised their risk profile. They also impacted emerging market currencies, debt repayments, and capital flows. For instance, 2023 saw many currencies in developing Asia depreciate substantially versus the US dollar due to aggressive tightening by the Federal Reserve. A natural question that arises is why some emerging markets are more resilient and/or less vulnerable to US monetary policy cycles, an issue examined in the study The Performance of Emerging Markets During the Fed’s Easing and Tightening Cycles: A Cross-Country Resilience Analysis by Joshua Aizenman, Donghyun Park, Irfan A. Qureshi, Gazi Salah Uddin and Jamel Saadaoui. One approach is to empirically assess whether macroeconomic variables such as debt levels and institutional variables such as degree of corruption can explain an emerging market’s resilience during each cycle. The study also takes a holistic approach to measuring emerging market resilience by focusing on the bilateral exchange rate against the US dollar; exchange rate market pressure; and the country-specific Morgan Stanley Capital International Index (MSCI). In addition, the role of policy factors such as exchange rate regime type and inflation targeting were also examined. At the broadest level, the existing research finds that macroeconomic and institutional variables are indeed significantly associated with emerging market performance. Furthermore, the determinants of resilience differ during tightening versus easing cycles, and the quality of institutions matters even more during difficult times. We found that cross-country differences in ex-ante macroeconomic fundamentals and institutional variables can help explain the differences in performance and resilience of a large cross-section of emerging markets during different US monetary cycles. These determinants differ during tightening versus easing cycles. The significance of ex-ante institutional variables increased during the monetary cycles triggered by the global financial crisis and the taper tantrum. This suggests that strong institutions matter more during difficult times. To address these issues, emerging market policymakers should understand that macroeconomic variables such as the amount of international reserves, the current account balance, and inflation are all important determinants of an emerging market’s resilience to US monetary policy swings. This reinforces the conventional wisdom that strong fundamentals protect emerging markets in the face of large external shocks. In particular, policymakers should continue to focus on vulnerable sovereigns with large external debt obligations and economies with highly leveraged property markets and weaknesses in capital markets that are typically challenged by the changing interest rate landscape. The borrowing costs of these economies might rise if there is a sudden deterioration in global financial conditions, further worsening their fragile fundamentals. To safeguard their economies against the volatility induced by US monetary policy, emerging market policymakers must prioritize strengthening macroeconomic fundamentals and institutions. This will help ensure long-term financial stability and foster sustained economic growth amidst the challenges posed by global financial fluctuations.
The Role of Psychological Factors in Personal Finance: How Biases Shape Economic Decisions
Personal finance, often perceived as a purely quantitative field, is heavily influenced by psychological factors and human behavior. Many economic decisions are not based on rational analysis but are instead driven by emotions, biases, and cognitive tendencies. Understanding the psychological aspects of personal finance can help individuals make more informed and deliberate financial choices, leading to improved financial well-being. This article explores the behavioral biases that affect financial decisions, their manifestations in daily life, and strategies for overcoming them. 1. Emotional Impact on Financial Decisions Emotions such as fear, greed, and overconfidence significantly impact financial decision-making. These emotions often override logical thinking and can lead to suboptimal financial choices. For example, during a market downturn, fear might cause individuals to sell their investments at a loss in a panic, while during a bull market, greed could encourage individuals to take on excessive risk. Fear and Loss Aversion: There is a tendency for individuals to dread losses more than they appreciate gains, known as "loss aversion." This can prevent people from taking necessary financial risks or lead them to hold onto failing investments, hoping for a recovery, which often exacerbates their losses. Greed and Overconfidence: In a rising market, the desire for greater gains can cloud judgment. Individuals might overestimate their ability to predict market trends, leading to speculative investments or the accumulation of unsustainable debt levels. 2. Cognitive Biases in Economic Decision-Making Cognitive biases are mental shortcuts or thought patterns that can result in consistent errors in judgment. In personal finance, these biases often distort our perception of risk, reward, and timing, leading to irrational decisions. Anchoring Bias: This bias occurs when individuals place too much weight on the initial information they receive, such as a stock's initial price or past investment returns. For example, an investor who bought a stock at a high price might irrationally cling to that price, waiting for it to return to that level before selling, even if market conditions have significantly changed. Confirmation Bias: This bias causes individuals to seek information that confirms their pre-existing beliefs while disregarding contradictory evidence. In finance, this could mean only engaging with financial news that aligns with one's market perspective or only following advisors who support their investment strategies. Availability Bias: People are prone to overestimating the likelihood of events based on how readily examples come to mind. For instance, after hearing about a friend's significant profit in the stock market, an individual might be more likely to take on excessive risks, overestimating their likelihood of success. Mental Accounting: This bias occurs when individuals categorize money into different "mental accounts" and treat it differently based on its source or purpose. For example, someone might be more willing to spend a tax refund frivolously but be more conservative with their regular income, even though the money is essentially the same. 3. The Endowment Effect: Overvaluing Our Possessions The endowment effect is the tendency for individuals to place a higher value on items they own simply because they possess them. This bias can lead to poor financial decision-making, especially concerning investments or material possessions. Overvaluing Assets: Investors might retain underperforming assets because they overvalue them, believing they are worth more than the market indicates. This can lead to missed opportunities for reinvestment or diversification. Aversion to Selling: Similarly, homeowners might overvalue their property, refusing to sell at a fair market price due to emotional attachment, even though selling could benefit their financial future. 4. Present Bias: Favoring Immediate Rewards One of the most pervasive biases in personal finance is the present bias, which is the tendency to prioritize immediate rewards over future benefits. This bias leads individuals to make decisions that provide instant gratification at the expense of long-term financial health. Spending vs. Saving: The present bias often results in excessive spending and a disregard for saving.
The best technology for your travels
1.Pocket CableNative UnionThe new cable from Native Union is superbly pocketable and designed to avoid tangling. It has USB-C connectors at each end of its 17cm cable, with both able to fold back into the case for tidiness. It’s capable of supporting strong charge levels, so it’s compatible with laptops as well as phones. Get it in one of five colours, including an eye-catching bright orange.nativeunion.com2.Soundlink MaxBoseThe new Bose speaker is small enough to pack in your carry-on but sounds huge. Rugged enough to resist shocks, water and dust, it boasts a rope handle that can be swapped out for a shoulder-length strap for further versatility. The battery lasts for 20 hours and the speaker can even charge your phone while playing audio.bose.com3.Galaxy Fold 6SamsungLeave your tablet at home and take this instead. The new Samsung folds out to a bright and attractive 7.6-inch display with a centre crease that’s now near-invisible in use. An improved camera system, fast processor and larger external display add to the appeal, even if it’s still a little thick when folded.samsung.com4.Tracking CardNomadThe new Nomad tracker will help should you ever lose your wallet or have it stolen. It uses Apple’s Find My system, which means it sends a silent message to any passing Apple device when marked as lost, with its location then securely relayed to your own chosen device. Barely bigger than a bank card, it can be charged via any MagSafe charging pad, making its integration into daily life a breeze.nomadgoods.comIllustrations: Yusuke Saitoh
Plaza Gomila – the colourful construction reviving the former beating heart of Palma de Mallorca
The neighbourhood of El Terreno, especially its epicentre at Plaza Gomila, was once the beating heart of nightlife in Palma de Mallorca. In the 1960s and 1970s it had a joyful, sunny disposition that pulled in visitors and performers alike: Jimi Hendrix and Tom Jones are both reputed to have strutted their stuff here (not together, mind). But then, as mass tourism boomed, a wall of hotels rose ever higher along the Paseo Maritimo, the boulevard that divides the district from the sea, creating a barrier that denuded the views, killed the vibe and pushed people away from the El Terreno strip. Clubs got tackier, bars closed, drug dealing became commonplace. Today? It’s reclaiming its old spirit, in part thanks to the island’s Fluxà family, the owners of the Camper shoe business.Striking graphicsMiguel Fluxà is a fourth-generation member of the Camper business. Now, along with his wider family and the foundations that they run, he is the developer of a standout project at Plaza Gomila, a point where several roads intersect. Designed by local firm Gras Reynés Arquitectos and MVRDV from the Netherlands (the in-demand Guillermo Reynés once worked for the Dutch studio, hence the connection), it’s a series of seven buildings, all in different hues and materials (from tile façades by Mallorca-brand Huguet to locally made pressed-earth bricks) and with varied roof lines to keep things interesting.Colour-coded streetscapeBrutus restaurantOffice for Gras Reynés ArquitectosThis dazzling intervention of reformed buildings (including one of the island’s first brutalist blocks, now painted dazzling white) and newly built elements is a miniature town in itself, with homes to rent, a supermarket, flower shop, café, restaurant, a just-added bakery and offices for Gras Reynés Arquitectos.Bakery designed by Jasper MorrisonFluxà explains the family’s motivation. “Tourism [on the island] started here; singers and celebrities used to come here,” he says. “It’s part of the history. We thought that it was possible to revive the neighbourhood – to make it more like it was and do something good for the city.” Fluxà says that the project has also demanded flexibility and an acceptance that when you have seven buildings to develop, you have to wait to see where it leads. In terms of motivation, he’s wary of using the “legacy” word. “I don’t care whether people know that we’re involved. We are just giving something back to where we come from.”Guillermo ReynésReformed brutalist buildingMonocle tours the project with Guillermo Reynés, who arrives on his bicycle – a mode of transport that matches the project’s success in being designed to Passive House standards, employing cross winds and external blinds to keep rooms cool and shaded. Reynés explains the colours that punctuate the scheme – a nod, he says, to the Mediterranean location and a neighbourhood that’s equally colourful. He also reveals his deep connection to the area: not only does he have a home nearby; he came here to party as a young man, in the very building that now hosts his offices.Saw-toothed and Huguet tilesThe developer and architects have changed the course of the down-on-its-luck plaza and have created something that serves the people of El Terreno. And while the economics are, of course, a key consideration, it is also clear that all involved want to do something to aid their hometown. To make a difference.Great expectations The project is pulling in many new businesses and now other architects and developers are bringing abandoned buildings back to life. And new nightlife players have arrived, such as an outpost of the upscale Lio cabaret club. But opportunities remain for people wanting to be part of a community making a shift in fortunes for El Terreno.
Harnessing the Power of Emotional Intelligence in Finance: How Our Mindset Dictates Our Economic Choices
Currency is not solely a medium of exchange—it is inextricably linked to our emotional landscape, values, and mental well-being. Our actions concerning money, whether it be saving, spending, investing, or borrowing, are frequently swayed by unconscious psychological elements. Gaining insight into these factors is essential for enhancing financial decision-making and securing enduring financial health. The discipline of behavioral finance, an intersection of psychology and economics, delves into how human emotions and actions can result in less-than-ideal financial choices. Ranging from fear and avarice to overconfidence and indecision, the mental dynamics of money guide our financial management and our reactions to immediate and future economic challenges. This piece will dissect the mental aspects of money, expose prevalent cognitive distortions and emotional impacts, and offer tactics to surmount these mental obstacles to execute more logical, deliberate fiscal decisions. 1. The Emotional Tie to Finances Finances often evoke profound emotions such as anxiety, embarrassment, remorse, and a sense of security. These feelings can propel us toward fiscal prosperity or steer us toward self-destructive patterns. Here's how our emotional link to money can manifest: Trepidation Over Financial Loss: Numerous individuals harbor a fear of financial loss, prompting overly cautious or conservative fiscal actions. This apprehension might lead to abstaining from investments, accumulating cash reserves, or deferring crucial financial choices like purchasing property or planning for retirement. While risk management is wise, excessive anxiety can impede individuals from undertaking actions that could accumulate wealth over time. Yearning for Financial Safety: For some, money epitomizes safety—assuring sufficient funds for emergencies, a comfortable lifestyle, and providing for loved ones. This quest for financial security can result in behaviors like excessive saving, minimal spending, or a complete avoidance of debt. While financial security is vital, an overemphasis on future savings can sometimes hinder enjoyment of life in the present. Financial Guilt and Shame: Shame related to finances is a prevalent emotional barrier. Those who believe they've made poor fiscal decisions may experience guilt or shame about their current financial standing. This can lead to avoidance behaviors, such as disregarding bills or sidestepping financial planning altogether. Overcoming this guilt is essential for progressing and establishing a robust financial future. Envy and Social Comparison: In a society driven by consumption, it's easy to fall into the trap of measuring our financial achievements against others. This can result in excessive spending or making fiscal decisions based on the desire to match peers, even if it conflicts with our actual requirements or objectives. 2. Prevalent Cognitive Biases and Their Influence on Fiscal Decisions Behavioral finance identifies several cognitive biases—mental shortcuts or thinking patterns—that can result in irrational financial decisions. Recognizing these biases can assist individuals in avoiding costly errors. Anchoring Bias: This bias emerges when individuals rely too heavily on an initial piece of information (the "anchor") when making decisions. For instance, when car shopping, a person might base their expectations on the first price they encounter, even if it doesn't reflect market value. This bias can lead to overpayment or undervaluation of financial decisions. Loss Aversion: Behavioral economics suggests that individuals tend to dread losses more than they appreciate equivalent gains. The emotional distress of losing $100, for example, is significantly greater than the joy of gaining $100. This bias can deter people from taking necessary risks, such as investing in stocks, even when potential long-term benefits outweigh the risks. Confirmation Bias: Individuals often seek information that confirms their preconceived beliefs or decisions, rather than considering alternative perspectives. For example, someone convinced of an investment's superiority might overlook warnings or red flags. This can result in poor investment choices or a failure to diversify. Overconfidence Bias: Many people believe they possess superior knowledge or skills, especially in investing. This overconfidence can lead to risky financial decisions, such as making speculative investments or underestimating the risks associated with certain financial choices. Overconfident investors may also disregard expert advice or minimize the importance of diversification. Recency Bias: This bias occurs when individuals place more importance on recent events than on
ASEAN Nations Must Capitalize on Trade, Digital Advancements, and Connectivity
Faced with a shifting global economic landscape, the Association of Southeast Asian Nations (ASEAN) can enhance economic stability and sustainable development by focusing on trade, tourism, and digital transformation. In an increasingly competitive global economy, nations are reevaluating their supply chains to mitigate risks and implementing protectionist measures to bolster domestic industries. Additionally, climate change and the contest for cutting-edge technologies, such as AI and big data, are now viewed through the lens of national security. Against this backdrop, the ASEAN bloc, comprising 10 nations, must collaborate to secure a prosperous economic future for their citizens and safeguard their national interests, with a particular emphasis on trade, digitalization, and connectivity. Trade, especially in services, is poised to play a pivotal role in ASEAN economies, encompassing finance, telecommunications, tourism, transportation, and professional services. These sectors are crucial for job creation and economic expansion. Post-pandemic, while goods trade has slowed, service trade has shown a positive trend, positioning ASEAN as a net service exporter. Tourism is a promising avenue for ASEAN, highlighting the region's appeal as a travel destination. To bolster competitiveness in tourism, ASEAN nations are expected to collaborate on infrastructure, skill development, marketing, and product innovation to boost intra-regional travel, which currently accounts for over 40% of ASEAN's international tourism, thereby enhancing regional economic resilience. The regional digital economy, including e-commerce and digital health, is projected to expand from $300 billion to nearly $1 trillion by 2030. With effective digital connectivity policies through regional cooperation, this figure could double. The Digital Economy Framework Agreement is central to this collaboration, addressing digital standards, data flows, cybersecurity, digital trade, and digital talent mobility, among other aspects of digital public infrastructure. Digital cooperation is also anticipated to yield additional benefits, such as positive environmental impacts, social cost savings of $12-30 billion, increased resilience, job creation, and improved access to education and healthcare. Lastly, both physical and institutional connectivity are essential for ASEAN's economic competitiveness, enhancing their engagement with larger Asian and global economies. Sustainable infrastructure, including renewable energy, low-carbon transport, and urban energy efficiency, is gaining momentum. By integrating this with enhanced digital cooperation and streamlined cross-border logistics and supply chains, facilitating the movement of goods, services, and people across borders will protect the environment and strengthen regional resilience. The collective approach to sustainable infrastructure is beneficial for ASEAN members committed to the Paris Agreement, with Nationally Determined Contributions aiming for net-zero CO2 emissions by 2050 and net-zero greenhouse gas emissions by 2065, to cap global temperature increases at 1.5°C. It is a strategic time for ASEAN policymakers to rethink collaboration. While economic fragmentation is evident globally, there are areas that necessitate cross-border cooperation. Economic self-reliance has grown in the region, and with pressing issues like digitalization and climate change, mismanaged interdependence could lead to costs and economic challenges. Hence, for the upcoming term of ASEAN regional cooperation until 2045, member countries should view their collective actions as a regional public good, where the benefits of enhanced trade, tourism, digitalization, and connectivity will lead to sustainable and resilient outcomes for the region's populace.