(MENAFN - Arab Times) KCIC, an investment firm specializing in investments in Asia, recently hosted a closed discussion with IHS Global Insight's Director of Sovereign Risk, Jan Randolph, who delivered an outlook on global economies for the year 2012 to an audience of local analysts, bankers, fund managers and investors.
Randolph's outlook focused on the main global driving economies: the US, the Eurozone, Japan and Emerging Asian Markets.
Randolph is a seasoned international economist and financial markets commentator on television and radio including Bloomberg, CNBC and Reuters TV, and has written extensively in the press, including the Financial Times, Washington Post, Newsweek, Observer and Business Week.
He is also the Director of Sovereign Risk with IHS Global Insight, based in London, where he has successfully adapted the risk management and internal rating modelling techniques for cross-country bank exposures to provide clients with a unique sovereign risk rating system for over 200 economies worldwide. He has both policy and hands-on experience in international risk management, especially in Emerging Markets.
He said, "The global economy faces three key risks in 2012, first an oil price shock from supply disruptions in the Middle East, second the Eurozone sovereign debt problems and lastly, China's real estate market downturn. These are interesting economic times as the impact of the 2008 financial crisis is still present and generating aftershocks such as the sovereign debt crises. However recent data suggests that global growth will pick up. Inflation worldwide has moderated, enabling more central banks to ease monetary policies."
Global GDP growth expected for 2012 and years to come show that Asia-Pacific will achieve the fastest real GDP growth at levels ranging between 6% and 7% annually between 2012 and 2020. Western Europe is expected to grow at the lowest global levels ranging between a negative growth in 2012 and less than 2% till 2020. Overall global economies are expected to grow between 2% and less than 6%.
Brent crude oil prices on the other hand are expected to sustain above 110 levels between 2012 and 2017. Prices are driven by sustained growth in EM, concerns over Iran's nuclear program and sanctions over the country, security challenges in Iraq and Nigeria, limited growth in non-OPEC supplies between 2012 and 2013, and the moderate influence of increased production from US tight oil fields and Canadian oil sands.
Randolph shared the following outlook on global economies:
* The US expansion will continue at a modest pace, restrained by inevitable fiscal tightening. The private sector will continue its deleveraging, and strengthening job growth will support consumer income and spending
* The Eurozone is in a mild recession and growth is expected to resume by mid-2012. The risks of a disruptive sovereign debt crisis have diminished
* Japan is suffering a loss of export competitiveness, and the reconstruction post the March 2011 earthquake and tsunami is proceeding slowly
* Asia will lead global growth, and Emerging Markets (EM) will continue to offer the best prospects, but not without risks. EM will also enjoy robust growth despite an export deceleration. As for China, its economy will achieve a soft landing, provided that the housing market downturn does not turn into a crash
* Latin America and Africa will do relatively well by historical standards.
On the US, Randolph said, "The corporate sector is rich in liquidity but lacks opportunities to invest, therefore guiding investors to place their money in safe-havens where risk aversion is very high. The US economy recovery continues to be pressured by the unresolved real estate."
The US growth will exceed growth in the Eurozone and Japan, reaching an expected 2% in 2012, and increasing year on year until 2016. Recent employment figures show encouragement - consumers and businesses are cautiously increasing their spending, the outlook on exports is favorable after 2012, and the US Dollar real exchange value will depreciate against EM's currencies.
A rebound in the housing markets remains key to a more robust economic growth. The threat of the Eurozone sovereign debt problems has eased. Fiscal policies will tighten, however timing and scope are uncertain. Oil prices risks have risen. The probability of a return to recession is today at 20%.
In Europe, the current mild recession is expected to end starting the third quarter. The Eurozone fiscal deficits are decreasing, the fiscal balance is expected to register a negative 3% of the GDP in 2012, and continue to ease to a negative 2% approximately of the GDP on 2013.
Randolph said, "The European Central Bank's massive lending to banks has helped ease credit conditions and reduce government bonds yields. To survive, the Eurozone will move towards closer fiscal integration, and Germany is key in achieving this step. The Euro is expected to depreciate to a low US 1.25 in the autumn of 2013."
He added, "Italy and Spain are making progress on structural reforms under their respective new leadership, and the contagion risks from Greece have diminished. Greece however remains in a dire situation and the probability of it exiting the Eurozone in the next three years is 40%, and that could trigger a financial crisis and deep recession, dragging down the US. Contagion will be contained if Greece remains in the Eurozone and the European Central Bank supplies ample liquidity."
Randolph's Eurozone headlines:
* Germany: it's recovery is very important for the countries around it
* Europe: The ECB should have a growth target, not just an inflation target
* Southern Europe: ongoing deep recession- solving the crisis will require fiscal reforms, policy coordination and steps to raise competitiveness of southern countries
* Banks with large sovereign debt exposure are at risk and will need to be recapitalized
* Many European banks are increasing their exposure to the EM
"EM have led the global growth since 2009, and even though we might not see double digit growth rates in China anymore, the growth rate of 6% or 7% is still very high. And it is interesting to see that China and Germany are slowing down together. China's performance is parallel to Europe," said Randolph.
EM will lead the global expansion. China and India will lead growth in EM with the highest real GDP growth between 2012 and 2016. And by 2021, Asia will be the world's top producer, grabbing 34.6% of world GDP. China alone will grab 19.6%, in comparison to a low of 6.1% for the Middle East and Africa.
Randolph said, "We have a positive outlook for China despite the present slowdown. Inflationary pressures are easing, enabling monetary policies to become selectively accommodative. Industrial production and retail sales continue to post solid gains, and the 2012 political transition brings a new generation of leaders.
"China is also facing challenges, its export-oriented growth model has reached its limits and to sustain growth, it will need to cultivate domestic demand and start adding more value through training and educating its workforce, to move up the value chain. Its growth is not decoupled from the world economy: housing prices have fallen once during the 2008 crisis, and now again with the Eurozone concerns."
He concluded on China, "It is managing the transition from intensifying the economy by adding more input to move more people to the cities, and therefore using the already intensified economy to generate growth."
IHS Forecast on China as of March 2012 show an expected 8.2% real GDP growth in 2012, 8.5% in 2013 and 8.5% in 2014. Consumer price inflation forecast as of March 2012 show a 2.9% growth in 2012, 2.8% in 2013 and 3.0% in 2014.
KCIC was founded in 2005 with a capital of KD 80 million by an Emiree Decree with a mandate to develop investment opportunities in Asia towards building an Asia focused asset management company. The public company employs a team of specialists in Asian markets and currently manages assets in excess of USD600 million. Key shareholders include the Kuwait Investment Authority, the Sovereign Wealth Fund of Kuwait, National Investment Company, one of the leading investment banks in the Middle East, and Al Ghanim Industries, one of the largest conglomerates in the Middle East.