From Crisis to Recovery In A Multi-Polar World

1. From Crisis to Recovery In A Multi-Polar World IMF Regional Economic Outlook October 2010 Dr. Nasser Saidi, Chief Economist & Head of External Relations, DIFC Authority 24th October 2010

2. Agenda • Decoupling: Moving ahead, but @ different speeds • Increasing links with Asia: Trade & Financial Linkages • New Economic Geography Necessitates Policy Reforms

3. Decoupling: Back to the Forefront • The Oct 2010 WEO forecasts emerging market economies (EMEs) to grow at 7.1% compared to advanced economies 2.7%. • Business cycles are becoming more closely linkedintraindustrial countries & EMEs. • However, there is a decoupling of business cycles b/n the two groups (Kose, Otrok & Prasad, 2008). • Decoupling has resulted from increased trade & financial flows between EMEs. Stylised facts on EMEs: • Fiscal consolidation + financial sector reforms in years preceding the crisis contributed to resilience to the Great Recession • Felt the effects of the global crisis later than the advanced economies, but have also recovered more sharply. • By 2030, Asian GDP is expected to exceed that of the G7 major industrial economies. • Source: IMF WEO, Oct 2010, Llaudes et.al (2010)

4. Increasing Links with Asia • Asia now accounts for about a third of the global economy, up from under just a fifth in 1980. • Emerging Asia’s share of world trade has doubled and of world GDP tripled in the past two decades. • On current trends, Asia will be about 50% larger than it is today (in purchasing-power-parity terms) and could be as large as the US and the EU combined by 2015. • Post-crisis recovery in Asia is driven by two engines: exports and strong domestic demand. Strong domestic demand reflects in part policy stimulus, but resilient private demand is also a factor. • GCC/ME recovery dependent on region’s strong Trade & Financial linkages with Asia • Source: IMF WEO Oct 2010, DIFC Economics, Singh (2010): “Asia Leading the Way”, Finance & Development, March 2010

5. GCC Increasing Links with Asia: Trade • Crisis led to sharp downturns in the more export-oriented economies of Asia • But, recent data (H1-2010) suggest that GCC-Asia trade has bounced back to pre-crisis levels (Q3 2008). • Asia is currently the GCC’s largest trade partner in exports (23.5% of total GCC trade); • Asia is second trade partner (26.3%) to EU (28%) in GCC imports. • Within Asia, India and China have the largest share of trade with the GCC. • Gulf countries increasingly integrated into Asia global supply chain: e.g. oil, gas, aluminum • Increasingly important role of infrastructure & trade logistics in increasing connectedness & growing intra-industry trade • Source: IMF DOTS, DIFC Economics

6. Major Trading Partners of the GCC - Exports • Source: IMF DOTS, DIFC Economics Asia’s rising share in exports

7. Major Trading Partners of the GCC - Imports • Source: IMF DOTS, DIFC Economics GCC’s Major Import Partners – the EU and Asia dominate

8. Composition of World Equity Markets: 1999-2010 • Source: S&P, as of Sep 2010

9. MENA needs to grow intra-industry trade & link with Asia • Grubel Lloyd Index of Intra-Industry Trade by Area

10. Policy Reform I: Re-Orient Trade & Investment Policies • GCC/ME should re-orient Trade, Investment & Financial linkages towards Asia: • Free Trade & Investment Agreements with China, India, ASEAN • Chiang Mai Agreement • Strengthen financial linkages by: • Linking Stock Exchanges • Integrating Payment systems • Regulatory & Supervisory Agreements: e.g. DFSA MRA with Malaysia • DIFC signed MOU with Hong Kong Monetary Authority and currently in the process of developing close relations with major financial centres with EMEs in Asia, Africa. LATAM • Move towards a ‘spider-web’ of financial markets away from ‘hub-spoke’ model

11. Policy Reforms II – Develop LC financial markets • MENA capital markets are dominated by bank assets and equities: Debt securities make up just 11.1% of Middle Eastern capital markets (GFSR Oct ’10) • Limited Monetary policy effectiveness in restoring credit growth • Financial Sector Development should be a policy priority : focus on SMEs, FOEs • Build local debt markets to partially offset bank deleveraging, liquidity constraints & fill funding gaps • Source: IMF GFSR Oct 2010 • Local currency financial markets development: • Enable monetary policy: provide CBs with a market to conduct OMOs & control liquidity • Government Debt: Diminish macroeconomic and financial vulnerability from energy price fluctuations • Financeinfrastructure and development projects in the region • Corporate Debt: Well-functioning debt markets will reduce dependence on bank finance • Mortgage Markets: cornerstone of housing finance

12. Expansionary Fiscal Policies: What next? • Source: IMF REO Oct 2010, Oct 2008 • Reserve accumulation -> countercyclical spending (expansionary fiscal policies) -> mitigated crisis impact on own economies & generated positive spillovers for their neighbors. • In 2009, KSA announced plans to spend $400bn on infrastructure over a 5-yr period. 2010 budget gov’t expenditure was placed at $144bn – increased spending on infrastructure, education & health.  • In the UAE’s 2010 budget, 49% of total government spending (AED17.45 bn) was allocated to economic sector, infrastructure and transportation. • Upward shift in Break-Even Oil Prices

13. Policy Reforms III: Rev. Diversification + Pvt Sec Participation • Fiscal stimulus/counter-cyclical spending => major driver of recovery • But: Increase in Structural Non-Oil Deficits • Economic diversification dependent on increased private participation by SMEs and FOEs • Policy reforms required including: • Fiscal policy focus on non-oil deficits • Review distorting fuel subsidies • Revenue diversification: GCC-wide VAT • Decrease Cost of Doing Business; • Attract private sector participation; • Infrastructure development (through PPPs). • Source: IMF REO, Oct 2010

14. Policy Reforms IV: Structural Reforms • Source: Doing Business 2010, World Bank. • The WB Doing Business 2010 report highlights UAE as one of the top 10 reformers. • Overall global ranking of UAE has improved to 33 in 2010 from 47 in 2009’s report. • The amendment and reform of the UAE Company law was a major economic policy reform measure helping to: • Lower the cost of doing business; • Provide incentives for new company formation and registration –particularly SME sector; • Improve the overall investment climate. • Across MENA/GCC deeper structural reform measures are necessary to stimulate new business: • Aiming at better enforcement of contracts; • Reforming Insolvency law; • Aim at easing both entry and exit of businesses (by reducing cost and minimizing uncertainty).

15. Summing Up: Policy Priorities to sustain recovery • New Silk Road requires shift in trade, investment & financial policies towards Asia and EMEs • Engage in design of new International Financial Architecture, Policy & Regulation • Develop Local Currency Financial Markets • Access to Finance for SMEs & FOEs • Fiscal Reform: Revenue diversification/ Expenditure rationalisation • Increased Private Sector Participation • Infrastructure Development through Public-Private Partnerships • Insolvency/ Bankruptcy & Creditor Rights frameworks

16. Thank You!