Lessons from the global financial crisis

Opinion Monday 29/October/2018 14:36 PM
By: Times News Service
Lessons from the global financial crisis

Although we cannot say with certainty that the world economy has completely recovered from the repercussions of the global financial crisis that took place a decade ago, the lessons learned have largely helped change the economic landscape.
Notably, the global financial sector’s regulatory frameworks have been tightened. However, it is yet uncertain whether this sector will be able to withstand a similar crisis again.
Countries in the Arab region have adopted legislations and regulatory frameworks that support financial stability and help safeguard the economy from real-estate bubbles.
They have also adopted economic diversification plans to reduce their reliance on oil and its related negative effects on the sustainable development of other economic activities. This will also lead to increased employment opportunities in the long run.
Some Arab economies have not yet recovered their ability to achieve high growth rates comparable to the pre-financial-crisis years. In addition, some economies face challenges to continue to keep up with the global trend to raise interest rates, especially regional central banks whose local currencies are pegged to the dollar.
Many economic sectors need liquidity and low-cost financing that is necessary for expansion and for achieving acceptable growth rates.
Globally, though the prevailing financial climate is still favourable and supports growth, there are imminent risks to financial stability in the short term. If the pressures on emerging market economies persist, or if trade tensions continue to escalate as we have seen lately, these risks may become more threatening.
Since the beginning of this year, there has been an increasing discrepancy between developed and emerging economies. While the global economic expansion continues, helping strengthen budgets and rebuild safety margins, it appears that growth has peaked in some large economies. This is a cause for real concern.
Despite the improvement in the global economy’s foundations over the past few years, emerging markets - which are still the least to benefit from this global improvement, will be impacted if developed economies adopt their usual fiscal policies again.
Such economies may face a decline in incoming capital, especially with the rising interest rates in the United States, along with the surging value of the US dollar and the escalation of trade tensions. Therefore, it is likely that more capital flows will exit emerging markets amid growing concerns about their resilience and the credibility of their policies.
The escalation of trade wars could shake investors’ confidence and potentially come in the way of global economic growth. Uncertainties regarding global politics, including Britain’s exit from the EU without reaching a specific agreement, or the concerns about public fiscal policies in some indebted European countries, may negatively affect the markets and could lead to a sharp rise in risk-avoidance.
With increasing inflation, central banks may accelerate the pace with regard to raising interest rates, a move that IMF warns will lead to a sudden pressure in the global financial situation.
During the past 10 years, the world has greatly benefited from some tough lessons learned from the financial crisis, which necessitated a comprehensive reform in the global financial regulatory structure. New tools and practices were developed and implemented in many countries. There has certainly been a great progress in implementation of the reform agenda designed to address these challenges.
Adopting new standards has led to enhancing the financial system’s resilience, with international markets now less reliant on financial leverage, thereby increasing the overall liquidity.
Some of the successes in this regard include the implementation of the Basel III Accord that focuses on capital and liquidity, and approves stress tests in the banking sector. Most Arab countries have achieved progress in creating mechanisms for precautionary safety and risk absorption, in addition to strengthening banking supervision, especially in large banks.
While acknowledging the quality of action taken to address the effects of the crisis, it is necessary to continue to work proactively to look for potential imbalances and to give priority to tightening control in new economic areas and activities such as fintech and e-security, among others, to avoid the possibility of similar crises, or at least minimise negative outcomes.
Regionally, continuation of economic diversification policies away from oil is the best way forward, with the need to build the knowledge economy and adopt a long-term investment in education and human resources as key pillars for sustainable development. All of these efforts will protect our nations from the potential risk of future crises.
*The author is the Executive Chairman of Investcorp and an International Advisor to the Brookings Instituition. All the views and opinions expressed in the article are solely those of the author and do not reflect those of Times of Oman.