Big 3 Green Competition and EM Implications
Bottom line: With the U.S. and Europe increasing the renewables energy push, and China setting its own course on climate change, increased competition should improve EM countries access to technologies and at a more affordable price. However, the starting point in finances will have an influence in adoption, which favors big EM countries as low income EM countries are struggling with foreign currency debt. Meanwhile, a major leap forward at COP28 in Abu Dhabi November 2023 remains unlikely, as strategic competition between the U.S. and China argues against agreement with the two key players.
Big 3 Green Competition and EM Countries
We have highlighted (here) that the U.S., EZ and China are increasing efforts to ramp up renewables electricity production and electric vehicles roll out. While at time this will see some tensions, we view this positively as it will lead to increased competition and momentum in the world three largest economic blocs.
All of this has some key impacts on EM countries and a number of points are worth making.
- With all three major economic powers driving green technologies forward this should make renewables and climate change solutions (e.g., electric vehicles/green hydrogen) more accessible and cheaper for EM countries to adopt. A lot of countries are focused on energy security after the Ukraine war and this drives domestic renewables investment.
- Brazil’s existing large hydro electricity production means it has an advantage domestically and in the region, as the Lula administration wants to champion Brazil’s green industry. India remains focused on a rapid scale up of solar power to replace imported fossil fuels and sustain strong growth with reasonable costed electricity production. China itself is also rapidly scaling up solar power electricity production, which should start to restrain coal and gas imports in the coming years. Russia’s initiatives on green adoption remains lacking, however, given the dominance of fossil fuel industries and the current domestic siege mentality with the Ukraine war. Finally, South Africa’s solar potential is being ramped up too slow to ensure stable electricity supply given the current crisis in coal fired power stations. This is set to be a big drag on South Africa’s GDP growth in 2023-24, especially as the 2024 election will likely see a weak ANC and Democratic Alliance coalition.
- While a lot of focus is on renewable electricity production in the 2020’s, the other big wave is to reduce oil demand for transportation via electric vehicles and green hydrogen (produced by renewables electricity) for ships/trucks and potentially airplanes. This requires a country to have spare renewables electricity production, but also a coordinated domestic plan to support infrastructure build out. Saudi Arabia green hydrogen ambitions should be watched closely in the coming years, as they want to take leadership in this area. Brazil/China and India have lots of ambition to swing behind the greening of transport, but it is also a question of EM countries finances to support government initiatives and aspirations.
- The good news for big EM excluding China is that their total non-financial sector debt (government/households and corporates) are not excessive (Figure 1) provided that they get inflation back towards targets. Monetary policy tightening in Brazil/India and South Africa should bring down real and nominal interest rates in the remainder of 2023 and 2024/25. In turn, this should control debt servicing and allow some government structural support for the electricity and transport revolutions required by climate change objectives. China’s total non-financial sector debt, however, is now higher than the U.S. or the Eurozone and has built up rapidly since 2007. China’s authorities can influence domestic creditors to rollover China’s Yuan debt avoid a major financial crisis, but new large increase in debt finance are unlikely. This will be a constraint in the latter part of this decade in terms of financing China’s domestic green initiatives. However, low income EM countries have a difficult financial position to allow them to accelerate electricity and transport transformations.
Figure 1: Total Non-Financial Sector Debt/GDP Since Q1 2007 (%)
Source: Bank of International Settlements
- The real difference in EM is between the big EM countries that largely borrow in their own currencies and low income EM countries that have borrowed in foreign currencies since 2007. The IMF has estimated that 37 out of 69 low income countries are in debt distress or at risk of debt distress and 8 countries are currently in default. One of the critical issue is how debt restructuring occurs for the 8 countries in default and others that have not defaulted but are in distress (e.g., Ethiopia). This has become more complex as debt is no longer dominated by western governments and banks, but includes private sector creditors and China. In the remainder of 2023, the Sri Lanka debt restructuring should be worth watching closely and the Ethiopia discussion on preemptive debt restructuring (with the IMF discussing a loan program and debt restructuring in tandem). The prospect is that the electricity and transport revolution will occur more slowly in low income EM countries than big EM countries over the next one to two decades.