Crisis highlights need for tighter regulation: EIB

A trader monitoring the stock exchange at Dubai Financial Market. The region's financial markets have recovered faster than expected, says an EIB study. (SATISH KUMAR)

The global economic turmoil was a man-made crisis that threatened human life and should not be repeated, said a study by the UAE government-controlled Emirates Industrial Bank (EIB) in its monthly bulletin released yesterday.

After weathering the crisis that affected the world's economic and financial system in the last quarter of 2008 and in 2009, the global economy is expected to recover in 2010 while those of the UAE and other developing nations could perform better, the study said. The UAE's gross domestic product (GDP) could still have grown by about 1.3 per cent, it said.

"The experience of 2008-2009 must rank as one of the most unique in recent global economic history, for this crisis was not a 'natural' one but rather 'man-made.' It highlighted the need not only for regulation, but for enlightened and competent regulation," the study said.

"More than the banking profession, it is the economic profession which failed. The failure of any other kind of enterprise is part of the market mechanism, but failure of even one bank can cause a serious disruption, and multiple banks' failure can result in the collapse of the entire international economic regime, in an inter-dependent and intertwined economic system that we live in now. The lessons learnt [will] hopefully [ensure that] such man-made oversights which are virtually 'life-threatening', do not happen again," it said.

Citing projections by the International Monetary Fund (IMF) and other global institutions, EIB said the global economy is expected to return to growth in 2010 after a decline in most economies last year.

Forecasts by the Washington-based IMF showed GDP in advanced economies would expand by about two per cent this year, further rising marginally to 2.5 per cent in 2011. This means that their output will not recover to pre-crisis levels till the end of 2011. Growth in emerging and developing economies is expected to rise to about six per cent in 2010.

"Developing countries are set to grow much faster than developed countries in future, and this applies to the UAE as well, even though the IMF projections for the Middle East are somewhat modest," EIB said.

It noted that 2009 was an exceptionally bad year for the global economy as it experienced negative growth for the first time since World War Two. The IMF estimates that the world economy declined by 0.8 per cent in 2009 over 2008. According to EIB, negative growth was largely in advanced Western countries and in post-communist Europe.

"However, no economy escaped the crisis with every single economy of the world seeing a lower growth rate than in the preceding year, 2008. This included China and India, the clear global leaders in 2009, who saw their growth rates nipped by several percentage points as compared to 2008," EIB said.

"This shows how intertwined the global economy is now and how events in one part of the world have immediate repercussions elsewhere," it added.

The study said the impact of the crisis was commensurate with and proportional to the economic size of the origin and consequently, the turbulence of the 2008 financial crisis in the richer, advanced Western nations that sent ripples across the entire world. "In comparison, the Great Depression of 1930 which was much stronger in intensity, was largely a local American affair."

Citing IMF estimates, it said advanced industrial economies collectively fell sharply by nearly 3.2 per cent in 2009. Surprisingly, the decline in the eurozone was higher than in the US, the epicentre of the crisis, it said.

East European economies were hit hardest with their economies plunging by about 7.5 per cent. Russia suffered in particular, registering the worst global growth rate of nine per cent. Developing countries, together, saw a positive growth rate of two per cent. China led the field with nearly 8.7 per cent growth followed by India with 5.6 per cent. African countries saw their combined growth rate tumble from 5.2 per cent in 2008 to 1.9 per cent in 2009.

"The Middle East, of which the UAE is a part, saw a modest 2.2 per cent growth rate. This seems to agree with the reported 1.3 per cent growth rate estimated for the UAE economy in 2009, despite Gulf Cooperation Council economies being even more sensitive to international turbulence because of the high role of exports and imports," EIB said.

"The UAE economy weathered the storm on the strength of healthy oil prices and a strong non-oil sector though oil prices in 2009 were lower than the high $150-a-barrel rates of 2008."

Financial markets recovered faster than expected thanks to huge bail-outs, EIB said. "Banks are no longer as cautious in lending as they were immediately after the crisis. UAE banks are in a healthy position because of sound regulation and face no serious liquidity concerns."

"Globally, small and medium-sized enterprises continue to face credit constraints as they are low priority customers for banks. This is also an issue in the UAE and how to ease lending to the SME sector needs consideration," it added.

 

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