We’re hitting the panic button here.
According to Microsoft co-founder Bill Gates, America could be headed for another financial crisis on the scale of the 2008 Great Recession.
A number of other experts are warning, but is anyone taking heed of this?
And there is no escape route available for the GCC, Middle East region, as well.
This is a growing multi-faceted international problem that will make the 2008 financial crisis look like a walk in the park, and it’s not going away.
Hello global crisis
The Bank for International Settlements (BIS), dubbed bank for central banks, is blaring the siren on a new debt crisis that could cause a long and painful recession, reported business intelligence site Business Insider (BI).
BIS said in its annual economic report for 2018 that the growing levels of government, corporate, and consumer borrowing create a “debt trap” that policy may not easily untangle down the road.
“Global debt across governments, nonfinancial corporations and households surpassed $160 trillion as at the end of 2017, according to BIS, aided by low-interest borrowing, and deficit spending.
Because growth and borrowing have become dependent on low rates, the economy, and financial valuations are more sensitive to higher interest rates, where they are now and rising.
“Indeed, a growing body of studies documents how higher leverage, in both the private and public sectors, can boost growth in the short run, but at the cost of lower growth on average, including deeper and prolonged recessions, in the future,” the BIS said.
Bank of America Merrill Lynch notes that cash has returned 0.7% in 2018, while equities have offered just 0.6% and government bonds have lost 0.8%.
Five (5) trouble triggers
US Federal Reserve called a historic end to quantitative easing in September 2017 and recently raised its benchmark short-term interest rate by a quarter percentage point and signaled that two more hikes are likely this year. The decision moves the funds’ rate target to a range of 1.75% to 2%, from near zero last year.
BI said that liquidity growth will turn negative in 6-8 months as a result.
As the $50 billion worth of American exports in response to similar US taxes trade fight between the US and its major trading partners keeps growing, Goldman Sachs’ equity strategists want clients to be prepared, reported BI.
Trump is requesting the US Treasury to identify an additional $200bn worth of Chinese goods for tariffs.
The global economy is more deeply indebted than before the financial crisis and countries need to take immediate action to improve their finances before the next downturn, the International Monetary Fund (IMF) warned.
The IMF said a prolonged period of low-interest rates had stimulated a build-up of debt worth 225% of world GDP in 2016, 12 points above the previous record level reached in 2009.
Growth in the global economy is expected to be 3.9% in both 2018 and 2019, but the IMF thinks the performance will not last.
It added that debt levels across emerging markets as a whole now averaged 50% of GDP, their highest level since the 1980s.
Debt service has also been rising rapidly, particularly in countries with high inflation rates.
Technology is also a troublesome issue, according to Fortune, saying that it creates roadblocks to effective global regulatory cooperation, potentially exacerbating future financial crises.
“Technology giants are now the leading providers of consumer credit and investment management, and in a deglobalized financial world, safeguarding stability and controlling contagion will become increasingly difficult,” said Fortune.
It explains that banks, payments providers, and technology companies bear different risks in each region, and thus their reactions to any single macroeconomic shock or policy change will differ too.
“The worst impacts of 2007–08 financial crisis were avoided because regulators effectively coordinated on a global scale. With different rules and no coordination, it would be much harder to avoid or control a new crisis,” said Fortune.
5-Death of Fossil Fuel
New research shows that the ultimate demise of the fossil-fuel industry has profound economic and geopolitical consequences, reports Science Daily.com, quoting scientific research by top UK universities.
“If exporters such as Russia or the US could see their fossil-fuel industries nearly shut down and If these countries keep up their investment and production levels despite declining demand, the global wealth loss could be huge: $1-4 trillion, a loss comparable to that which triggered the financial crisis in 2007,” it said.
Europe not safe
A major financial crisis is about to hit the EU, says billionaire investor George Soros, as reported by Finance Twitter.
Soros said Europe was in “an existential crisis” and presented 3 challenges: a refugee crisis, territorial breakups (such as Brexit), and economic struggles due to austerity policy.
Four (4) ME, GCC financial traps
On June 11, 2018, Saudi, the UAE and Kuwait pledged 2.5 billion dollars to help Jordan, a Levant country suffering under the weight of austerity measures.
Jordan relies heavily on foreign aid, and was the recipient of $3.6bn in annual assistance program it receives from the GCC but which had been interrupted last year, likely due to GCC’s own oil price-related cut in expenditures.
From June 2014 to January 2018, oil prices plummeted from $115 per barrel to $68 per barrel, a 41 percent decline. Prices reached a low of $28 on January 19, 2016.
Franklin Templeton Investments has cut back its debt holdings in Bahrain, citing the “very serious” threat that the cash-strapped nation will experience an economic crisis in the next 12 months if financial aid from neighbors doesn’t come through.
The Bahrain Central bank foreign exchange assets plummeted to a 2001 low of about $1.2 billion last year. They have almost doubled since, helped by cash raised through bond sales, but the government has about $2 billion of interest payments on bonds through 2019, according to data compiled by Bloomberg.
3-Rising oil prices no savior
Rising oil prices are easing fears of a financial crisis in the Gulf. For example, every $1 rise in the average price of oil this year would tend to improve Saudi Arabia’s budget position by roughly $2.1 billion, London’s Capital Economics estimated.
But oil price increases look unlikely to trigger another economic boom in the region, a recent Reuters poll of 20 economists shows.
The median forecast for GDP growth for four countries in 2018 – Saudi, the UAE, Oman, and Bahrain has been raised, but only slightly. Saudi, for instance, is now expected to grow 1.5% instead of IMF’s 1.3%, and a deficit of 7.2% of GDP, down from an earlier estimate of 7.5%.
4-Debt steeply rising
Despite the improved economic forecast, the IMF estimated cumulative overall fiscal deficits in the region to be $294 billion in 2018-22, the Financial Tribune reported.
“Around $71 billion of government debt is expected to mature during the same period,” the business site reported the IMF as saying.
“The rapid build-up of debt in many of the Middle East and North Africa countries is a cause for concern. Debt has increased by an average of 10 percentage points of GDP each year since 2013, with countries financing large fiscal deficits,” the IMF report said.
The average debt in the region for oil-importing countries exceeds 80% of GDP, according to the IMF.
According to the Brookings Institute, for the 2015–2017 period, the GCC accumulated an estimated $353 billion in fiscal deficits, $76 billion in current account deficits, $270 billion in foreign-exchange reserve losses, and a reduction of $213.3 billion in sovereign financial net worth.