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

The Pak Banker - - Front Page -

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.

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