The current state of the global financial system is beset by challenges, including the potential peaking of interest rates, record-high global debts, and looming geopolitical and climate-related risks. Amid these complexities, international bodies like the United Nations are calling attention to the significant funding gap required to meet the 2030 Sustainable Development Goals (SDGs), estimated at approximately US$4 trillion annually or roughly 4 percent of global GDP. Furthermore, a study by McKinsey Global Institute from August 2023 emphasizes the need for substantial investments, around 8 percent of global GDP annually, to lift underserved populations out of poverty and drive progress toward achieving net-zero goals.
While these financial demands may appear daunting, McKinsey’s own data illustrates that the means to fund such changes do exist, contingent on political will. Over the past two decades (2000 to 2021), the global balance sheet expanded at a rate 1.3 times faster than GDP, culminating in a staggering $1.6 quintillion in assets. This figure encompasses $610 trillion in tangible assets, $520 trillion in financial assets outside the financial sector, and $500 trillion within the financial sector. Given this context, the global financial system, with roughly $500 billion in assets (according to Financial Stability Board estimates), should theoretically be capable of accommodating the required funding of $4 to $8 trillion annually or a growth rate of 0.8 percent to 1.6 percent.
One significant barrier to substantial funding for SDGs is the voracious appetite of advanced, wealthy nations for global savings. The United States, for instance, boasts a net international investment deficit of $16.1 trillion as of the end of 2022, equivalent to a staggering 15.5 percent of the world’s GDP. Large fiscal deficits in the US have been projected by the Congressional Budget Office (CBO), with estimates indicating a reduction from 12.4 percent of GDP in 2021 to 3.7 percent in 2023, only to rise again to 6.1 percent by 2032—far surpassing the 3.5 percent average deficit observed over the last 50 years.
In essence, the fate of global sustainability goals hinges on whether wealthy nations divert funding toward global SDGs or channel resources into domestic defense and consumption. Neglecting international concerns in favor of domestic interests risks exacerbating climate change and inciting social disorder.
Within Asia, affluent nations like Japan, South Korea, China, Taiwan, and Hong Kong SAR, alongside Singapore, amass net investment surpluses totaling $10.4 trillion. A substantial portion of these savings has been invested in U.S. and European financial assets or foreign direct investments, facilitated in part by international financial hubs such as Hong Kong and Singapore. The Gulf’s financial centers may also emerge as crucial funders for Central Asia, the Middle East, Africa, and South Asia.
Future global growth is expected to center around Southeast Asia and India, collectively harboring over 2 billion people, predominantly with younger populations. These regions require substantial funding for poverty eradication, infrastructure development, and investments in achieving net-zero emissions. Notably, Hong Kong holds gross international assets of HK$47.5 trillion (US$6.1 trillion) and a net position of US$1.76 trillion as of the end of 2022.
Singapore follows with gross international assets of S$7.1 trillion (US$5.2 trillion) and a net investment position of S$1.1 trillion (US$813 billion). The pivotal question revolves around whether these financial hubs possess the appropriate financial institutions to mediate the supply and demand for funding the structural transformation of the global South.
In the global context, multilateral development banks like the World Bank face limitations due to their relatively small size and reluctance from major shareholders to increase their capital. Official Development Assistance (ODA) to developing countries in 2021 amounted to a mere 0.33 percent of donor GDP, well short of the target of 0.7 percent of GDP. Fiscal constraints in many wealthy nations have led to cutbacks in ODA.
Although Hong Kong and Singapore possess substantial banking systems, Basel Rules governing capital, liquidity, and total leverage have made banks more cautious about financing long-term infrastructure and SDG projects.
In the face of these challenges, insurance companies, pension and provident funds, and sovereign wealth funds are the most likely institutions willing to take higher risks. However, insurance companies remain cautious due to increasing natural disaster risks, while long-term pension funds have predominantly maintained their asset allocation in advanced countries. Sovereign wealth funds, with over $10 trillion in global assets, have only recently shown a greater willingness to embrace higher risks in alternative assets.
The current international financial system’s ability to address climate change and fund SDGs remains uncertain. As climate disasters and social disorders become inevitable, financial systems must bear the consequences of their reluctance to take risks in support of the real economy. The world is at a crossroads, with wealthy Western nations preoccupied by their own challenges, leaving emerging powers and diverse visions to shape the future of the South.
The question remains whether financial institutions in international hubs like Hong Kong and Singapore will step up and embrace higher intermediation risks for the benefit of the global South, particularly in Southeast Asia and India, where the need for funding is critical. The evolving geopolitical landscape, marred by sanctions, central bank interventions, and increased protectionism, complicates the role of free market flows, rendering equity funding as a potential solution for absorbing higher risks—a solution that is increasingly intertwined with geopolitics. In this changing world, the international financial system must adapt to new realities or face consequences, regardless of central banks’ interventions. In essence, the West is no longer the sole arbiter of global affairs, and emerging powers and their financial institutions will play an ever more prominent role.
