Yaseen Anwar: Smooth Sailing or A Bumpy Ride Going Forward

2019-04-09 IMI

Yaseen Anwar, Sr. Adviser, ICBC Singapore; Former Governor, Central Bank of Pakistan; Int. Advisory Board, International Monetary Institute, Renmin University Ten years earlier we faced the early stages of the Global Financial Crisis (GFC) that changed the shape of the global economic landscape and included the collapse of two venerable Wall Street Firms, Bear Stearns and Lehman Brothers, and that led us to unprecedented negative interest rates in Europe, and what was to be a prelude to a gradual slowing of the dominant Asian economy that was supposed to lift us out of a deep recession and stimulate global growth. What is in store for us going forward? Today, future Corporate earnings outlook in some analyst’s mind is grim, combined with the trending Yield Curve, increased country Debt, Risk Averseness of Financial Institutions to long term credit, looming negative interest rates once again in Europe, continuing contentious Trade War, Geopolitical conflicts, the independence of the Fed n question, and the ever-present unresolved Brexit, provide a compelling backdrop to a possible recession with continuing global uncertainty. So what measures should be taken to protect us from these vulnerabilities and where are we to find the necessary resources to lift us in support of stimulating sustainable global economic growth? Michael Milken, one of the Notable graduates of the Wharton School at the University of Pennsylvania, created the popular Junk Bond market in the 1980’s to enable the smaller, non-rated companies access to capital which they did not nor would have had access to. Milken’s creativity in opening new potential economic opportunities triggered not only new Capital Market opportunities for investors, but also added a new stimulus to the overall growth of the economy with new jobs and consumer purchasing power. A whole new industry of New Capital developed that motorized a new generation of professionals and created a new variety of financial products. The Risk/Reward ratio also added a new dimension to Asset Allocation strategies as improved availability of financial data provided added comfort to investors in expanding their Risk appetite in search for higher returns. Analogous to Milken’s strategy, the Belt Road Initiative (BRI) provides that very access to capital for those BRI connected emerging market economies that have NOT had in the past the necessary Investment Grade Ratings to tap the international Bond market for sorely needed funding to finance long term infrastructure projects. Such economies, with vast potential natural resources i.e. Africa, Pakistan, etc., have never had the opportunity to attract offshore investors who require investment grade Ratings dictated by their corporate policies, nor do those investors have the Risk appetite to venture in uncharted emerging markets, or simply opted for safer and Rated opportunities in mature markets of Europe, the U.S., or Japan. Safety and preservation of Capital was foremost in an uncertain and volatile global economy. Infrastructure, the core of BRI funding, is and has been the engine of growth for most economies. The Industrial revolution of the 19th century in the U.S. transformed an agrarian based economy to a technological and manufacturing based economy, lifting the U.S. as a leading global economy in the 20th century. The New Deal in the 1930s with its emphasis on Infrastructure reforms in Finance, industry, Agriculture, construction of highways, bridges, Power Dams in the U.S., not only pulled the economy out of Depression of the 1920s, but leap frogged the economy for the remainder of the 20th century and beyond into a trajectory as the largest economy in the world. The domestic network of connectivity in transportation comprising of railroads and trucking, resulted in an economic expansion in SMEs, Agriculture, housing, finance, and so on. In fact the majority of trade for the U.S. happens to be domestic within its own 50 states. Such Infrastructure, or the lack thereof, has hampered the very economic development that many BRI related countries sorely need. The shortage of Power in Pakistan has impaired GDP growth rates of up to 3% and the lack of a developed transportation network for refrigerated trucks for distribution of agricultural products, results in a 50% loss of perishable products. It is estimated corrective measures could generate substantial annual FX earnings. Filling this gap and elevating Pakistan’s 5th largest milk production rank in the world could generate up to another $500 Million in annual Export earnings. Given the historical and current backdrop for infrastructure needs, it is difficult to fathom why anyone would be averse to supporting the Financing gap of Trillions the can be filled by BRI as a logical remedy in building the necessary defenses to cushion vulnerabilities. BRI and its collective resources of Multilaterals can also be leveraged to fill the financing ‘gaps’ and alleviate concerns of Risk Averse private sector lenders and investors. The past two years have witnessed BRI successes already positively impacting on certain economies with new employment and improved productivity. In 2017, Piraeus handled more than 4 Million containers for onward distribution to Europe, Dusport-Germany is the largest inland port in the world, 10,000 plus companies are now operating across the African continent connecting via an expanding transportation network of rail and roads, more than $60 Billion of new business has been generated between Africa and 54 countries in investments and Tourism, new housing in Indonesia, Power projects in Bangladesh, roads in Pakistan/ Kazakhstan, ASEAN trade has increased last year by over 12% and still increasing with huge potential of the current Asian regional intra trade at 23-25% compared to European/NAFTA intra regional trade at 57-63%. The current trajectory is in the positive direction. Logically and intellectually BRI makes sense for the above reasons. Why would anyone want to create obstacles or block it? BRI translates into ample resources and opportunities to stimulate industrial growth and provide the inclusive growth as well as preserve stability on a regional level. Payments settlement risk can also be reduced by using the RMB as an alternative currency. Dark clouds and exogenous shocks are possible on the horizon and regional economies need to install risk mitigating shields. BRI’s desirable attributes provide the necessary ingredients to restore faith, confidence, and some stability in the International Monetary System and at the same time generate new employment and reduce poverty in many countries connected to Belt & Road.

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Yaseen Anwar: Smooth Sailing or A Bumpy Ride Going Forward

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