In a ‘dollarised’ world, no country is immune to crisis: IMF

DUBAI

In a unipolar ‘dollarised’ world, no region or country is immune to a global crisis. As the economies of the Middle Eastern countries grow and gradually become integrated with the global economy, they also become affected by the crisis.

A one per cent drop in European gross domestic product (GDP) reduces the GDP of the Gulf countries by 0.35 per cent, according to the International Monetary Fund.

“The Middle East has a substantial stake in Europe’s recovery,” Anshu Jain, Co-Chairman of Deutsche Bank, said at the DIFC Forum, organised by the Dubai International Financial Centre (DIFC) Authority.

The European economy accounts for one fifth of the roughly $70 trillion global economy, so its recovery significantly impacts global prospects. Since 2007, more than $7 trillion of liquidity – or a tenth of the global GDP – has been pumped into the system by the world’s central banks. This life support was essential in avoiding another Great Depression. But it also distorted financial markets. Interest rates remained all-time low.

This lingering crisis has its affect on the Middle East and the GCC region, he said. “More specifically, the Eurozone accounts for 15 per cent of the exports from the Middle East and North Africa (MENA) region, and consumes 12 per cent of the world oil. Europe accounts for a high share of the foreign direct investment into key Middle East Nations,” Jain said.

The policy of quantitative easing, designed to stimulate consumption, has an impact on savers – who face negative real returns – or even sometimes, negative nominal returns. It has other consequences too. Asset bubbles emerge – for example – in emerging markets assets, or real estate.

“This artificial abundance of liquidity affects the Middle East in several ways,” Jain said. “It lowers the yields on your dollar-denominated reserves. Furthermore, several economies in the region are effectively pegged to the dollar, so loose US monetary policy is imported into the region, which may drive inflation.

“Declines in the value of the dollar reduce the value of the reserves held by the Middle East may also find that in this environment, some overseas banks face constraints on their capacity to provide shortterm liquidity.”

For that reason, he suggested that banks in the region should seek more stable sources of funding where possible.

Jain, a veteran banker with 27 years of experience, however, warns of a significant consolidation in the global banking industry and the emergence of a ‘shadow banking’ sector – a sector whose total assets, by some estimates have grown to $67 trillion – almost the size of the global economy.

“The rise of‘shadow banking’ is not necessarily a problem; however, as international and European regulators have recognised, it does lead to a transfer of activity from the tightly-regulated banking sector to a less regulated sector,” he said.

“We expect to see proposals to regulate the ‘shadow banking’ sector, but reform here is a long way behind what is already in place in the mainstream banking industry.”

It took more than a millennium for the West, powered by the industrial revolution to take the centre stage of the global economy from the East. However, it could take just a few decades to change that and shift the centre of the global economy back to Asia, according to global research and consulting firm McKinsey and Company.

“Today, global economy is undergoing a paradigm shift. While Europe is struggling to stabilise and come out of a major economic crisis, we see a solid growth in the East – India and China,” Abdul Aziz Al Ghurair, Chairman of the DIFC Authority and Chief Executive Officer of Mashreq Bank, said.