Challenging Times

The soaring cost of living, tightening financial conditions in most regions, the geopolitical tensions in Europe and the prolonged pandemic are weighing heavily on the economic outlook

The debate about whether the global economy is in a recession or ‘teetering’ on the edge of a recession or sufficiently robust to avoid a recession just got even more complicated. The world is being confronted by a broad-based and sharper-than-expected slowdown with inflation higher than seen in decades.

“The challenges that the global economy is facing are immense and weakening economic indicators point to further challenges ahead,” the International Monetary Fund (IMF) cautioned in November.

The soaring cost of living, tightening financial conditions in most regions, the Russia-Ukraine war and the prolonged pandemic all weigh heavily on the outlook. Economists say the outlook is even gloomier than projected earlier in the year, but with careful policy action and joint multilateral efforts, the world can move toward stronger and more inclusive growth.

The war in Ukraine continues to ‘powerfully destabilise the global economy’ with its impacts causing a ‘severe’ energy crisis in Europe though regional governments have been seeking to find alternatives to Russian supplies.

The global financial services industry is facing numerous challenges. The higher risks in energy and energy-intensive lending together with the impact of higher rates and a slowing global economy will hurt bank loan quality.

Meanwhile, cryptocurrencies extended losses in the last quarter of the year with the global crypto market value plunging below $900 billion as the world’s largest digital currencies, bitcoin and ether, remain under pressure from the fallout from the collapse of Sam Bankman-Fried’s crypto exchange firm FTX.

The UN Secretary-General António Guterres, in his UN climate change conference address in Egypt, called for the creation of a “climate solidarity pact” between wealthier and developing countries as global temperatures continue to rise. Guterres warned that the planet is “on a highway to climate hell with our foot on the accelerator.”

However, the Middle East has been a bright spot in 2022, a year otherwise marked by high inflation and recession fears. The upswing contrasts with a slowdown in much of the world economy as oil exporters in the MENA region, the

six-country Gulf Cooperation Council, have received a windfall from high oil prices.

This year has perhaps been one of the most challenging in modern times and it is hard to downplay the scale of the geopolitical and economic uncertainties that the world is facing—from individual households to governments to businesses.

A financial perspective

With the global central banks raising interest rates to quell decades-high inflation amid the impact of geopolitical tensions in Europe, for the first time the test will check on the resilience of banks to soaring borrowing costs.

Global banks were well on track to a long-lasting post-pandemic recovery of their financial strength, but this is no longer the case as the global economic environment has deteriorated markedly throughout the year. Wall Street banks’ profits plunged in the third quarter as they braced for a weaker economy while investment banking was hit hard.

JP Morgan Chase, Morgan Stanley, Citigroup and Wells Fargo showed a slide in net income after turbulent markets choked off investment banking activity prompting the banks to set aside more rainy-day funds to cover losses from borrowers who fall behind on payments. “Weaker growth, higher-for-longer interest rates and market borrowing costs and higher unemployment will hit household and corporate sector borrowers. This in turn will hinder banks’ asset quality and potentially bank outlooks and ratings,” S&P Global said.

For most banks, the immediate effect of higher interest rates is positive because it will benefit their net interest income, but the broader risk of an economic downturn could weigh on future earnings.

Meanwhile, the Middle East region’s top four lenders posted a combined $13.5 billion in the nine months to the end of September and S&P Global said that the earnings performance of banks in the GCC will recover almost to prepandemic levels in 2022, thanks to the economic recovery.

The Middle East is the hotbed of wealth creation and global banks are vying for a greater share of the wealth created in recent years, driving fierce competition for advisers who can bring billions of dollars in assets under management.

The number of millionaires in the Middle East is expected to continue rising in the coming years. Henley & Partners projected in June that the UAE will lead the world in attracting private wealth to its economy as Russian and Ukrainian millionaires seek new homes. The country is set to welcome 4,000 millionaires as Russia and Ukraine are likely to suffer a net outflow of 15,000 and 2,800 high-networth individuals, respectively.

Banking customer intimacy and creative use of technology is driving disruptive innovation in the financial service sector. It is the key for financial institutions to understand their customers better than their competitors and digitalisation is a significant component in achieving this. Many banks have embraced and deployed technological solutions to meet the evolving customer demands and the trend is expected to continue.

THE EXPERIENCE OF THE 1970S, THE POLICY RESPONSES TO THE 1975 GLOBAL RECESSION, THE SUBSEQUENT PERIOD OF STAGFLATION AND THE GLOBAL RECESSION OF 1982 ILLUSTRATE THE RISK OF ALLOWING INFLATION TO REMAIN ELEVATED FOR LONG WHILE GROWTH IS WEAK

– The World Bank

THE CHALLENGES THAT THE GLOBAL ECONOMY IS FACING ARE IMMENSE AND WEAKENING ECONOMIC INDICATORS POINT TO FURTHER CHALLENGES AHEAD

– The International Monetary Fund

Crypto nightmare

Once a potential rival to gold as a safehaven store of value, cryptocurrencies have largely lost their lustre among institutional investors amid growing concerns over how far the fallout from Sam Bankman-Fried’s sprawling crypto empire might spread.

“The unexpected potential collapse of an industry stalwart like FTX is a hugely negative development for cryptocurrency and the resultant chaos in the markets only reinforces that. However, crypto has survived events like this before, emerged stronger and gone on to reach new highs,” Chainalysis said in a blog post.

The demise of FTX, one of the world’s largest cryptocurrency exchanges, has left an estimated one million creditors facing losses totalling billions of dollars. FTX, which filed for US bankruptcy court protection, said it owes its 50 biggest creditors nearly $3.1 billion.

The collapse of the crypto exchange firm mirrors the collapse of the algorithmic stablecoin terraUSD and sister token luna, the pausing of withdrawals by crypto lender Celsius and the liquidation of

crypto-focused hedge fund Three Arrows Capital earlier this year.

Global economic meltdown

2022 has been a miserable year for the global economy and things may spiral out of control as the IMF cautioned in November that the prospects for growth are more pessimistic than what it forecasted earlier.

History teaches us that central banks’ aggressive tightening of the monetary policy may tip the global economy into recession in 2023. Few economists will be surprised if soaring energy prices do the same for Europe while the double whammy of China’s zero-COVID policy and a slowdown in the country’s property market threatens to bring the world’s secondlargest economy to a near standstill.

Bloomberg Economics projected that in an extreme downside scenario if all these headwinds hit at once, it could wipe out as much as $5 trillion in global output next year, compared with more upbeat forecasts at the start of this year.

The Federal Reserve is expected to raise its federal funds rate by half a percentage point to the 4.25%-4.50% range at its December 13 and 14 policy meeting after the central bank delivered a 3.75% to 4% rate earlier in November. Global central banks are likely to follow the Federal Reserve in risking a recession as they seek to combat the effects of a soaring dollar and rising inflation.

According to the World Bank, “The experience of the 1970s, the policy responses to the 1975 global recession, the subsequent period of stagflation and the global recession of 1982 illustrate the risk of allowing inflation to remain elevated for long while growth is weak.”

Fitch Ratings forecasted coincident recessions in the US and eurozone, which would be the fourth time since 1980 that the world’s two largest economies contract simultaneously. The recessions will weigh on growth prospects elsewhere, especially in emerging market economies that are reliant on developed market demand.

Economists also see China’s zeroCOVID policy as having a greater economic impact than the Ukraine war. The country is adhering to the policy that involves drastic restrictions on mobility and total closures that were imposed in several areas in Beijing and Shanghai in November as the authorities grapple with a spike in new cases.

The IMF’s first deputy managing director Gita Gopinath urged Chinese authorities to boost vaccination rates and give more robust support to the country’s troubled property sector to restore confidence and reduce risks from a global economic slowdown

Meanwhile, the Middle East and Central Asia economies were resilient this year with recovery continuing but the IMF warned that the region must guard against growing global headwinds and push ahead with reforms going forward. While crude exporters in the region will benefit from an oil windfall projected to accrue a cumulative $1 trillion between 2022 and 2026, emerging market and middle-income states face deep terms-of-trade shock and curtailed access to market financing.

WEAKER GROWTH, HIGHER-FOR-LONGER INTEREST RATES AND MARKET BORROWING COSTS AND HIGHER UNEMPLOYMENT WILL HIT HOUSEHOLD AND CORPORATE SECTOR BORROWERS. THIS IN TURN WILL HINDER BANKS’ ASSET QUALITY AND POTENTIALLY BANK OUTLOOKS AND RATINGS

– S&P Global

Journey to net zero

The United Nations Framework Convention on Climate Change (UNFCCC) said in a report in October that government plans to slash carbon emissions are not enough to avoid catastrophic global warming, with the planet on track to heat between 2.1 and 2.9 degrees Celsius by the end of the century.

The report by the UNFCCC was published ahead of the Climate Change Conference (COP 27) in Sharm el-Sheikh, Egypt where developed and developing countries squared off over who should pay for destruction caused by climate change.

However, the COP27 climate talks ended with a deal to create a fund to pay developing countries for the harm caused by climate change. The deal on loss and damage is seen as a landmark moment in global climate politics—an acknowledgment that richer nations are responsible for the harm caused by global warming emissions.

The Middle East is hosting two consecutive rounds of the United Nations climate summit with the UAE set to host COP28 in November 2023. The UAE said in October 2021 that it would invest $163 billion in renewable energy as part of its strategy to achieve net-zero emissions by 2050. “Globally, $1.8 trillion of investment into adaptation efforts could generate $7.1 trillion in total net benefits by 2030,” the World Economic Forum said last month.

Central banks around the world have been raising interest rates this year with a degree of synchronicity not seen over the past five decades in response to soaring inflation—a trend that is likely to continue in 2023. Meanwhile, the world’s three largest economies, the US, China and the eurozone, have been slowing sharply and under the current circumstances, even a moderate hit to the global economy over the next year could tip it into recession.

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