With, the omnipresent COVID-19 – The financial crisis of 2008 was a piece of cake as proposed by ELECTRIFYING on 9 April 2020 we are given a comparative view of the different crises that currently shake not only the world of finance but the world at large.
The world has seen difficult financial times before, like the ‘Black Tuesday’ in 1929, which we all know as the ‘Great Crash of Wall Street’. Only 13 years ago, we were able to observe another crash originating in the USA but spreading all over the world to end in a global financial crisis. Yet we see ourselves heading towards the next crisis at a frightening pace, but surely, we should be prepared and have learned our lesson from mastered crisis’.
Unfortunately, the unpleasant truth is that the world has not seen this kind of crisis before, as it is constituted genuinely different from the ones we already went through. This time the financial insecurity hasn’t been caused by banks or real estate market; it has been triggered by a global virus which led to the shutdown of economies backbone – SME businesses. The mentioned shutdown has resulted in a short-term demand and supply shock of real-economy to first affect the stock exchange due to its pro-active market responsiveness.
Further effects are the inflation of bonds and company shares as it takes some time for rating agencies screening forecasts and month-end reports until updating the credit rating of companies and governmental entities. The United Kingdom, Mexico, Brasil, Argentina, Iran, Irak and many others have already been cut.
The world has seen difficult financial times before, like the ‘Black Tuesday’ in 1929, which we all know as the ‘Great Crash of Wall Street’. Only 13 years ago, we were able to observe another crash originating in the USA but spreading all over the world to end in a global financial crisis. Yet we see ourselves heading towards the next crisis at a frightening pace, but surely, we should be prepared and have learned our lesson from mastered crisis’.
Unfortunately, the unpleasant truth is that the world has not seen this kind of crisis before, as it is constituted genuinely different from the ones we already went through. This time the financial insecurity hasn’t been caused by banks or real estate market; it has been triggered by a global virus which led to the shutdown of economies backbone – SME businesses. The mentioned shutdown has resulted in a short-term demand and supply shock of real-economy to first affect the stock exchange due to its pro-active market responsiveness.
Further effects are the inflation of bonds and company shares as it takes some time for rating agencies screening forecasts and month-end reports until updating the credit rating of companies and governmental entities. The United Kingdom, Mexico, Brasil, Argentina, Iran, Irak and many others have already been cut.
Eventually, the real estate market will as well see a correction of the booming prices due to a rising supply but limited buyers in the market, partially as an effect of travel boundaries and decreasing cash pools of investors and individuals. If there are only ten local prospective buyers compared to hundreds of international interested parties, the current peek prices will no longer be achieved.
As an upside, we don’t expect hyperinflation to kick-in caused by billions of Pounds, Dollars and Euros simultaneously flooding the markets for the sake of securing liquidity. Indeed, central banks had no other choice but to keep the printer on full throttle to steer against the sharp drop in the stock market. In contrast to an earlier crisis, globalisation and digitalisation have driven the supply of equivalent products to a majority of goods and services, e.g. Cinema vs Netflix, Restaurants vs Delivery Services, Physical Meetings vs Video Conferences. Besides, shelves in most supermarkets around the world are still filled with necessities despite numerous media promotions regarding panic buying.
As it happens, the real threat this time is the shutdown of SMEs, the resulting mass unemployment and the dropping purchasing power. Millions of people all around the world are losing their jobs, struggling to pay their rent and mortgages while facing severe existential issues. In the aftermath, tax deficiency, reduced economic growth, and ongoing down grades of institutions and countries as a whole will also impact the stock market in the long run. Hence, we expect further global economic struggles to highly depend on the realisation of global decision makers’ strategies
A lesson taught from past experience illustrates that a financial crisis always shows unexpected long-term collateral. The Imperial College of London has released a study in 2016, stating an additional 260,000 deaths linked to the financial crisis of 2007/08. This frightening result has been assigned solely to unaffordable or late cancer diagnosis/therapies of countries without universal healthcare in the OECD like the US or UK.
Within the energy sector, business is still running as usual with some effects of dropping prices due to the reduced demand. On the other hand, postponement of new installations is inevitable. Power utilities and O&M companies are classified as being essential infrastructure, which enables their staff to hit the road and keep the energy flowing. Although the restrictions and enhanced H&S measures (PPE, scheduling of lone working, unavailability and avoidance of hotels, increases of travel time, etc.) also bear additional costs to the energy sector, it has been vastly unaffected so far.
Ending this blog post with some good news, Forbes has published an astonishing figure of 72% of all energy project in 2019 were renewable, which would be an eager target for the FY2020 as well.
What direction do you see our economy heading towards?
MENA sovereign wealth funds are set to yank billions from stock markets, with the cash needed back home reportedAlison Tahmizian Meuse in an article Gulf faces recession as oil deluge meets COVID-19 in an Asian Times article dated March 30, 2020. It is said elsewhere notably in the local media that these sovereign funds could shed something like $300 billion.
A stairwell in the Queen Elizabeth II cruise liner docked at Port Rashid in Dubai, where the tourism sector has been devastated by the COVID-19 pandemic. Photo: AFP
Middle East oil exporters are bracing for recession and the lowest growth rates since the 1990s, with economists warning that the “twin shocks” of Covid-19 and plummeting oil prices will have a knock-on effect across the region.
“Quarantines, disruption in supply chains, the crash in oil prices in light of the breakdown of OPEC+, travel restrictions, and business closings point to a recession in the MENA region, the first in three decades,” the Institute of International Finance warned this week.
Oil exporters in the Gulf and North Africa are projected to see growth levels drop to 0.8%, IIF said, based on an average price per barrel of $40. At the time of publication on Monday, crude was hovering at cents above $20 per barrel.
Petro-titans like Saudi Arabia, which have shifted major resources toward sovereign wealth funds in recent years, are expected to recall funds back home as their collective surplus of $65 billion is flipped inside out to a deficit of the same amount or more.
These sovereign wealth funds could shed up to $75 billion in stocks in the coming period, Reuters on Sunday quoted JPMorgan’s Nikolaos Panigirtzoglou as saying.
Saudi Arabia’s Public Investment Fund currently holds significant shares in everything from ride-hailing app Uber to Japan’s SoftBank.
Such funds have likely already offloaded as much as $150 billion-worth of stock in the month of March, said Panigirtzoglou.
How did we get here?
Saudi Arabia earlier this month launched an oil price war, flooding the market with crude in a game of chicken against Russia after the latter refused to collaborate on production cuts.
Moscow, which desired lower prices to compete with US shale, did not blink.
The result has been, Bloomberg reports, a “cascade” of oil surplus, with some landlocked producers literally paying buyers to relieve them of supplies they cannot store.
From Saudi Arabia to Algeria, MENA exporters are expected to see hydrocarbon earnings fall by nearly $200 billion this year, according to the Institute of International Finance report, resulting in a loss of more than 10% of GDP in this sector alone.
As the price war was launched, the novel coronavirus began spreading through the Gulf, shattering hopes of diversifying toward tourism in the near future.
Saudi Arabia, with approximately 1,300 confirmed cases as of Monday, has shuttered the gates of Mecca over fears it could become the new virus epicenter after Iran.
The religious pilgrimage to Islam’s holiest sites, mandatory for every Muslim, nets Saudi Arabia billions of dollars each year.
Knock-on effect
The financial troubles in the Gulf do not stop at the Persian Gulf, but are slated to have a painful knock-on effect across the Middle East region.
Young people from Lebanon, Jordan, and Egypt – with its population of 100 million, have for decades turned to the Gulf Arab states for jobs after graduation, doing everything from running restaurants in Riyadh to working in banks in Dubai.
Such positions have become even more crucial in a time of heightened visa restrictions in the United States and Europe.
A recession in the Gulf, thus spells an even worse outlook for already struggling economies in the Levant, which often look to the oil producers for help during hard times.
“A global recession will lead to a reduction in trade, foreign direct investment, tourism flows, and remittances to Egypt, Jordan, Morocco, and Lebanon,” IIF said.
Egypt, the report notes, is expected to see a “significant drop” in critical Suez Canal transit revenues, as global trade suffers.
The Egyptian government earlier this month revoked the press credentials of Guardian correspondent Ruth Michaelson after she reported on a researcher’s findings that Egypt was seeing a higher number of Covid-19 cases than reported.
An IMF blog article by Deniz Igan dated February 12, 2020, holds that Construction Activity Can Signal When Credit Booms Go Wrong. This state of affairs seems to apply almost universally. Indeed, as per the French saying “when the building goes, everything goes,” it appears that it took time for the international financial institution to reach this conclusion, especially with regards to the countries of the MENA region.
In Spain, private sector credit as a share of GDP almost doubled between 2000 and 2007. This increase was accompanied by a boom in housing prices—which doubled in real terms over the same period. The economy as a whole also grew at a record pace.
But then in 2008, Spain’s credit bubble burst, and with it came loan defaults, bank failures, and a prolonged economic slowdown.
A less-noticed development in Spain was in the construction sector, where employment grew by an astounding 47 percent, compared to the economy-wide increase of 27 percent.
New IMF staff research, based on a large sample of advanced and emerging market economies since the 1970s, shows that long-lasting credit booms that featured rapid construction growth never ended well.
New evidence on credit booms
Rapid credit growth—known as “credit booms”—presents a trade-off between immediate, buoyant economic performance and the danger of a future crisis. The risk of a “bad boom”—where a rapid credit growth episode is followed by a financial crisis or subpar economic growth—increases when there is also a boom in house prices.
Long-lasting credit booms that featured rapid construction growth never ended well.
Our research shows that the experience with the dangerous combination of credit booms and rapid expansion in the construction sector goes beyond the Spanish borders and extends to time periods not related to the global financial crisis.
We find that signals from construction activity may help to tell apart the dangerous booms, which need to be controlled, from the episodes of buoyant but healthy credit growth (“good booms”).
Credit booms do not lift all boats alike
During booms, output and employment expand faster. But not all sectors behave the same. Most of the extra growth is concentrated in a few industries—specifically, construction and, at a distant second, finance.
However, the same industries that benefit the most during booms experience the most severe downturns during busts. This implies that credit booms tend to leave few long-term footprints on a country’s industrial composition.
Construction is special
Construction is the only sector that consistently behaves differently between good and bad credit booms. On average, output and employment in the construction sector grow between 2 and 3 percentage points more in bad booms than in good ones. In all other sectors, the difference is smaller and not significant (except trade, but only when it comes to output growth).
What makes construction special? Construction does not have the growth potential of many other industries. In other words, too much investment in construction may divert resources away from more productive activities and result in lower output.
Also, the temporary boost in construction employment and the relatively low level of skills needed may discourage some workers from investing in their education and skills. This may have long-lasting effects on output after the boom ends.
Finally, construction projects have large up-front financing needs, and final consumers of the product (for example, houses or hotels) also tend to borrow to finance their purchases. As a result, debt may increase significantly more during booms led by construction.
The predictive power of construction activity
An unusually rapid expansion of the construction sector helps flag bad credit booms. A 1 percentage point increase in output and employment growth in the construction sector during a boom raises the probability of the boom being bad by 2 and 5 percentage points, respectively.
Construction growth is also a strong predictor of the economic costs of bad booms than other variables. A 1 percentage point increase in output growth in the construction sector during a bad boom corresponds to nearly a 0.1 percentage point drop in aggregate output growth during the bust.
Policy takeaways
If policymakers observe a rapid expansion in the construction sector during a credit boom, they should consider tightening macroeconomic policies and using macroprudential tools (such as higher down payments for mortgages).
In some cases, policy action will be triggered by other indicators, such as house prices or household mortgages. Sometimes, however, these other indicators may not sound the alarm (for example, because the construction boom is financed by the corporate sector or by foreigners), yet risks accumulate. Then, unusually rapid growth of construction could give a signal, for instance, to impose limits on banks’ exposure to real estate developers and other construction firms.
Finally, given that data on output and employment in the construction sector are often available with a few months’ lag, higher-frequency indicators such as construction permit applications could act as valuable signals. Construction indicators should also be included in models that assess risks to future economic activity.
MENA accounted for 20% of total portfolio flows to emerging financial markets from 2016-2018.
Karim Sahib/AFP
São Paulo – The Middle East and North Africa (MENA) have stood out in capital flows in the last years, according to article published this Wednesday (15) on the International Monetary Fund Blog.
Written by Jihad Azoud, director of the Middle East and Central Asia Department at the IMF, and Ling Zhu, an economist at the same department, the article reads that since the global financial crisis of 2008, emerging countries have experienced a surge in capital flows and that this flow to the MENA nations have remained high compared to other emerging markets, but their composition has changed significantly.
The change includes a surge in portfolio flows – foreign investment in the financial and capital markets – and a simultaneous decline in foreign direct investment – those non-linked to the production sector, real estate acquisition etc. Portfolio and bank inflows to the region reached USD 155 billion over 2016–2018, which accounted for nearly 20% of total portfolio flows to emerging economies during those two years. The value was about three times the volume of flows to MENA over the previous eight years.
The IMF analysts find that most of the portfolio flows increase can be attributed to a more favorable global risk sentiment that is below its historical average. “Portfolio inflows are mostly driven by global ‘push’ factors, such as financial market risk sentiment,” the article reads that about two-thirds of the increase can be attributed to that.
Other factors are the fiscal and external deficits resulting from increased spending in such countries as Egypt, Jordan, Lebanon, and Tunisia, as well as lower revenue in oil exporters such as Bahrain and Oman after 2014. “Capital inflows have helped governments finance these deficits,” the IMF blog stresses. Moreover, the recent inclusion of Gulf Cooperation Council (GCC) countries — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates — in global bond and equity indices has also contributed to the rise in portfolio flows to the region.
Risks
However, the article warns that with global economic risks now on the rise, the region’s countries would be particularly vulnerable if global risk sentiment shifts — especially those with significant fiscal deficits, high debt burdens, and limited buffers. The blog goes on to say that the region is twice as sensitive to changes in global risk sentiment as compared with other emerging economie, which most likely stems from the higher perceived overall risk of the region, reflecting factors such as geopolitical uncertainties, volatile oil prices, and global trade tensions.
To strengthen their resilience to volatile flows, the blog reccomends improved policy frameworks not only in attracting but also in preserving flows, while helping mitigate the risk of outflows. As examples, the text mentions that Egypt has established inflation targeting and that Morocco has made progress in allowing more flexible exchange rates. As usual, IMF urges that reducing fiscal deficits are critical.
The article also stresses the need for structural reforms to strengthen financial system and macroeconomic steps to reduce the regional economies’ vulnerabilities.
Per the Central Bank of Kuwait, Global uncertainty, trade tensions, fintech impact banks. Central Bank chief lays out a multipronged strategy to face these challenges. An article dated 23/09/2019 and written by Jamie Etheridge sheds some light on the stressful world trends as witnessed from Kuwait. These on-going trends if contextualised happen at a time when the global energy transition, the historic shift to low-carbon emission economies, is increasingly gaining attraction as more and more countries make the move to sustainable development in all its forms. Would not be this the real reason for the current upheaval in the financial world?
KUWAIT: (From left) Central Bank of Kuwait Governor Mohammad Al-Hashel, Finance Minister Nayef Al-Hajraf, Acting Prime Minister and Defense Minister Sheikh Nasser Sabah Al-Ahmad Al-Sabah and Minister of Commerce and Industry Khaled Al-Roudhan attend the International Banking Conference on Shaping the Future yesterday.- Photo by Yasser Al-Zayyat
KUWAIT: Financial technologies are disrupting the global banking industry, creating concerns across the globe for what the future holds at a time when the global economy is facing many challenges. To address this issue and hear what senior regulators, policymakers and industry leaders think, the Central Bank of Kuwait organized the International Banking Conference on Shaping the Future yesterday.
In his keynote speech, Central Bank of Kuwait Governor Dr Mohammad Al-Hashel addressed the challenges facing the global banking sector today. “Three challenges are particularly worth highlighting: The state of the global economy; the revolution in financial technology; and the rapidly evolving needs and expectations of customers,” Hashel explained. He noted that the International Monetary Fund (IMF) twice lowered its global growth projections for 2019 to 3.2 percent, with developed economies expected to grow at a much slower rate of 1.9 percent. A key driver of this slowdown is economic uncertainty brought about by rising trade tensions and protectionist policies. “If trade tensions continue, the IMF may further revise down its economic growth projections,” he said. The Central Bank chief also explained that “global debt over the past 20 years has grown on average by 6 percent annually, compared to 3.5 percent for global GDP. If these rates continue, we could see global debt over the next 20 years reaching $780 trillion, or 500 percent of GDP. This is clearly unsustainable, and requires urgent action by both governments and financial institutions.”
The threat from Big Tech is also a looming concern for regulators and the banking industry. “What would happen when the likes of Facebook, Amazon, WhatsApp and Alibaba start competing with banks to provide financial services? These technology giants come with large and captive user bases, low online acquisition costs, and a better understanding of their customers through their utilization of big data. Moreover, they don’t face the same regulations and associated costs that banks do,” Hashel pointed out.
Meeting the evolving needs of customer expectations in the fast-paced global environment further adds to the weight of the need for change, and all of this is further exacerbated by heightened geopolitical tensions and trade disputes. To meet these challenges, Hashel laid out a strategy of attack that focuses on five key areas – customer loyalty, value, efficiency, resilience and talent. He also called for greater proactivity on the part of regulators and the banking industry.
“We the regulators must also consider how we should operate in the future. We need to take a proactive and dynamic approach to promote innovation, and act as a catalyst for the industry. We need to promote collaboration and share our experiences with each other to develop frameworks that will fit the needs of our societies. And we need to focus on capacity building to ensure that our staff can meet the future challenges of the industry,” he said.
Held under the patronage of HH the Amir Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah and attended by Acting Prime Minister and Defense Minister Sheikh Nasser Sabah Al-Ahmad Al-Sabah, the conference brought together central bank chiefs from around the region, banking executives, chief economists and leaders in the industry to discuss what the future holds for banking, the impact of fintech and how banks can better collaborate, cooperate and shape a sustainable future for all.
Originally posted on Good Food on Bad Plates: We don’t typically make a lot of stews because Toddler Mash doesn’t typically eat them. A couple of weekends ago, though,we ended up making a lamb cobbler on the Saturday and kusksu (Libyan couscous with spicy beef and vegetables) on the Sunday. He surprised us on the…
Originally posted on Imen Bliwa Blog: Abib, Sierra Leone’s immigrant helping a friend’s child while camping in front of UN building in Tunisia Along with many of his friends and neighbors, Abib had to spend days and nights in front of the UN building (IOM). A calm fancy neighborhood next to Tunis Lake turns into…
Originally posted on Mackneen, The Algerian Goldfinch: It’s Spring, like the season then, twelve years ago. Time flies, like a bird. On this day, twelve years ago, I created this blog and I gave it a name: Mackneen,The Algerian Goldfinch. On that day I went to Algiers for a visit to my mother, and to my…
This site uses functional cookies and external scripts to improve your experience.
This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish.AcceptRead More
Privacy & Cookies Policy
Privacy Overview
This website uses cookies to improve your experience while you navigate through the website. Out of these cookies, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may have an effect on your browsing experience.
Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information.
Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. It is mandatory to procure user consent prior to running these cookies on your website.
This site uses functional cookies and external scripts to improve your experience. Which cookies and scripts are used and how they impact your visit is specified on the left. You may change your settings at any time. Your choices will not impact your visit.
NOTE: These settings will only apply to the browser and device you are currently using.
Google Analytics
To provide me with an idea of my site’s performance
Karim Sahib/AFP
You must be logged in to post a comment.