There is a saying, “When the US economy sneezes, the emerging markets get a cold.” The global economy now may be more complex: it is more resilient in terms of where new economic growth emerges, but more vulnerable in terms of risk emanating from the United States, but also in China, and in sites of conflict and geopolitical competition.
Inflation is the immediate risk, but the outlook for shared global growth looks more uneven as the traditional drivers of innovation and investment from the West now face a prolonged demographic decline, coupled with rising nationalist sentiment, and protectionist trade and industrial policies.
The Covid-19 pandemic, Russia waging war in Europe, and a distrust of China’s economic model all influence Western strategic assessments, but the trendline of growth and productivity decline has been building for some time. In the rich world, between 1980 and 2000, GDP per capita grew annually on average about 2.25%, but in the last twenty years that growth has halved.
Challenges in the Arab region
For the Arab region, 2023 will bring a set of new challenges to balance the opportunity of high resource revenues with more structural inflationary pressures and a widening gap between energy importers and exporters. The upside is that now is a tremendous moment of opportunity for some Arab states to take leadership roles in regional and global investment to accelerate new technologies to solve some of our most pressing energy needs.
For investors, the war in Ukraine will continue to have repercussions in the global economy, whether in energy flows or food supplies. Tensions between the US and China add potential risk escalation scenarios, as well as the failure of the Iran deal negotiations and the new reality of a nuclear arms race in the Middle East. For the United States, its Middle East policy will have to change, necessitating a new kind of economic and security engagement across the Arab region.
In markets, what happens in the US and the decisions of the Federal Reserve’s Open Market Committee will continue to influence global costs of borrowing.
For Arab economies with currencies tied to the US dollar, the strength of the US dollar combined with higher interest rates creates some challenges to domestic bank liquidity. For weaker Arab economies, debt sustainability will be a pressing challenge to governments and will change their relations with international financial institutions, as well as with their Gulf neighbors willing to provide central bank deposits, currency swaps, and commitments of foreign direct investment.
Oil and the markets
The economic health of the Arab region remains connected to the whims of global commodity markets, especially oil and gas. We don’t really know the depth of the global economic slowdown ahead, or its impact on energy demand in 2023.
For oil, how quickly and with what urgency can demand recover in China? The good news is that oil prices remain, for now, at levels in excess of Gulf Cooperation Council (GCC) fiscal and breakeven levels. Fiscal policy has been more constrained than in previous windfalls, and new efforts at tax collection and the growth of tourism and service sector activity in the GCC is cushioning the possibility of a crash on the other side of this oil market swing.
Perhaps more important though is the shift in external GCC assets; the breadth and scope of Gulf investment has never been more transformational in the global economy. One estimate by a leading investment bank sees an upside scenario where Brent oil prices rise steadily over the next three years to $120/bbl, GCC external assets could reach a value of $6 trillion. But even with a scenario of much lower oil prices, to levels of $40/bbl, the GCC asset value flattens at a very significant level of just about $5 trillion. That’s not exactly a crash in influence in a downside scenario.
Global oil production is shifting as well, as the cost curve for financial and regulatory constraints changes. This creates an advantage for dominant Gulf producers willing to invest in production. It also makes their politics more complex with members of OPEC+ and the largest global oil producer, the United States. At the same time, the outlook for global natural gas demand has drawn Arab producers from North Africa, the Levant and the Gulf closer to Europe.
For the Arab region, inflation and high energy costs add to broader challenges to human development, as a recent UNDP report assesses a real backtracking in development indicators. Trust in how governments can respond to external economic challenges, whether originating from a pandemic or a global recession combined with inflationary pressure, remains low and deteriorating in the region.
A recent Arab Barometer survey found that only 30 percent of respondents reported having a great deal of trust in their governments as responsive to the needs of its citizens.Read full article at Asharq Al-Awsat