The group head of origination, client coverage and corporate finance at Standard Chartered bank has said the global economy is split into two parts, with the United States and Europe on one side and the Middle East, Asia and Africa on the other.
And while there has been significant turmoil in financial services in the West, V Shankar is confident that the East will be sufficiently insulated and will continue to see growth. Shankar spoke to Emirates Business about sectors in the East that may be vulnerable, but he stressed that the impact would be limited.
Can you explain your theory about economic separation between East and West?
I am not suggesting that there is a complete decoupling between what is happening in the West from what is happening in the East. The Asian crisis in 1997 had marginal impact on the United States and Europe and what is happening in the West now will have some impact on the region.
However, the turmoil in financial services has severe impact on the real economy in the West, while the situation in the Middle East, Asia and Africa is very good. I am sure this impact will appear after some time, but it will be marginal and will not reverse the course of progress in the Middle East, Asia and Africa. The outlook for the Middle East and Asian banking sector is very prosperous.
Why do you have so much confidence in Eastern growth?
The regional economy is growing very fast compared to the western economies. There are several reasons for believing in continuous progress. First, a lot of regional countries are realising surplus in their economy – the Middle East and some Asian countries are generating huge amounts of capital surplus.
The second major reason is the huge investments in several areas, particularly infrastructure. The third one is what I call demographic factors – such as large populations, young populations, and well-educated populations with aspiration for development. This demographic factor is an essential part of the development story. Due to these factors, countries and firms in the East are facing this crisis with a natural defence because their borrowing and leverage levels are low and they are in very good cash positions.
Despite limited cash in the West and increasing surplus in the East, we have seen a campaign against sovereign wealth funds. What do you think is behind this?
You can compare it to when a flowing river encounters a stone. Water goes around it and keeps flowing. The same is true for capital. When a door is closed, it goes to another door. When a country blocks the flow of capital, it will simply go to another country, regardless of if it is in the West or East. The current situation in the world economy has created competition for capital and every company needs to compete to get its required capital to expand and grow. In the end, the West will accept Eastern investors. SWF have been investing in the West for a long time, but this issue is being raised now because Asian countries, especially China, and the Middle East region are creating huge surplus because they are producing some items and services that others need or they are saving more and spending less.
These surpluses need a home, and when they were invested in treasuries, no one had objections. But when capital was shifted from treasuries to equities, everybody objected and I think this is a natural debate and it will take some time until people adapt to the new trend. There is also media hype on this issue because for every two deals rejected, there are 198 deals accepted. There was a debate 10 years ago about protectionism in the Middle East and Asia and now there is a debate in the West about the openness of their markets. There is a lot of investment flowing between the West, the Middle East and Asia and there are huge investments moving around the world. If the West wants to regulate investments by SWF, they will have to regulate hedge funds, and SWF in the West.
Which Eastern sectors are at risk from the slowdown in Western economies?
Clearly, areas that rely on exports to the United States and Europe will be the most exposed to the current credit crisis. Producers of items of mass consumption by average American consumers, especially garments as well as different items you can see in large stores, will be affected because the demand is dropping and a significant portion of these items are being exported from major Asian countries including China and India to the US markets. These exports are a major source of cash flow to the region. I cannot talk about oil prices going up or down, but I do not see oil demand dropping – you can just look at China and the large number of new cars being added to the streets every day.
In the Middle East, a lot of young people buy cars and the current situation indicates increasing demand for energy. Accordingly, the oil sector will continue to boom. For commodities, there are clear inflationary pressures in Africa, Asia and the Middle East due to high growth rates and the increasing investments in commodities, which has led to increasing prices. However, historically commodities prices, soft and hard commodities, have not moved a lot. And there has been very low levels of investment in these areas to create new production capacity. Low investments in commodities has created imbalance between demand and supply.
Can exports to the United States that are currently struggling find alternative markets in the Middle East and Africa?
The international economic balance is changing. Ten years ago the Middle East was looking at the West. Asia also, especially China, was looking at the West, and they did not look at each other. The exception was India because there were historical relations between India and the Arab world. Now things are changing very rapidly and Asia, the Middle East and Africa are coming closer. Just look at the number of visits made by Middle Eastern leaders to Asia and visits by Asian leaders to the Middle East.
From an economic perspective, there are huge discussions on joint investments between Asian and Middle Eastern countries. In Standard Chartered, we have advised and engaged in major transactions in this region – such as between the UAE and Malaysia and between Malaysia and Saudi Arabia. So the level of business dialogue is increasing very significantly. This is a natural evolution because Middle Eastern countries are generating huge cash and their cash needs areas of investment and the whole Asian region needs the capital and has less political concerns about Middle Eastern capitals so there is a natural collaboration.
Asian firms are looking for markets for their products outside their home countries and the Middle East is growing very fast, creating opportunities for them to export their skills, talent and production. We see increasing trade and investments among Asia, the Middle East and Africa. From a trade financial perspective, Standard Chartered is well positioned in terms of delivering banking services. From hedging to risk management, we have the ability to offer high services.
Do you think whether the banking sector benefit from these new trends in the international economy?
For Standard Chartered, the bank was essentially established 150 years ago for transactions between Africa, the Middle East and Asia. And 150 years later, this idea proved to be right because the centre of economic gravity is shifting to Asia, the Middle East and Africa, giving us a significant advantage due to our long expertise and understanding of these markets. International banks are coming to the region, especially Dubai, because there is tremendous progress and increasing potential to expand due to high economic growth. There is also increasing competition, but ultimately we, in Standard Chartered, are differentiating ourselves by the high level of customer relationships. We are supporting our customers and we are bringing ideas to help them access the financial network.
V Shankar, Group Head of Origination, Client Coverage and Corporate Finance, Standard Chartered
Based in Singapore, Shankar also serves as Executive Chairman of Principal Finance and Chairman of Private Banking. Before joining Standard Chartered in 2001, Shankar was with Bank of America in Asia and the United States for 19 years where his last position was managing director of Asia-Pacific Investment Banking and chief executive officer of BA Asia based in Hong Kong. He holds an MBA from the Indian Institute of Management, Bangalore, and a Bachelor's degree in Physics from Loyola College, Chennai, India.