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Rising Chance of Global Recession in 2023

According to a thorough new study by the World Bank, as central banks around the world simultaneously raise interest rates in response to inflation, the world may be edging towards a global recession in 2023 and a string of financial crises in emerging market and developing economies that would harm them permanently.

According to the report, central banks have been rising interest rates this year with a degree of coherence not seen in the previous fifty years. To lower global inflation to pre-pandemic levels, however, the currently anticipated trajectory of interest rate increases and other policy interventions may not be sufficient. Investors anticipate central banks to boost global interest rates by more than 2 percentage points over their 2021 average through 2023, to about 4 percent.

Interest Rate Increases

The study indicates that if supply disruptions and labour market pressures don’t abate, those interest rate hikes could leave the global core inflation rate at roughly 5% in 2023, which would be nearly twice the five-year average prior to the pandemic. The report’s model suggests that central banks may need to increase interest rates by an extra 2 percentage points in order to reduce global inflation to a rate that is consistent with their aims. If financial market stress were to accompany this, global GDP growth would fall to 0.5 percent in 2023—a per-capita contraction of 0.4 percent that would technically qualify as a worldwide recession.

The analysis emphasises the highly complicated conditions that central banks are now fighting inflation in. A number of past global recession indicators are already sounding the alarm. Following a post-recession rebound, the world economy is currently experiencing its greatest decline since 1970. Compared to the period leading up to previous global recessions, the loss in worldwide consumer confidence has already been much more severe. The three largest economies in the world—the US, China, and the euro area—have all seen a significant slowdown. Given the situation, even a slight blow to the world economy over the course of the ensuing year might send it into a recession.

The report analyses the current trajectory of economic activity and proposes possibilities for 2022–2024 by drawing on lessons learned from previous global recessions.

Prior Global Recessions

By analysing the economic activity’s current trajectory and making suggestions for 2022–2024, the research builds on the knowledge gained from prior global recessions. In order to stimulate activity during slowdowns like the one we are presently going through, countercyclical policy is frequently necessary. The prospect of inflation and the limited fiscal headroom, however, are forcing policymakers in many countries to reduce policy support even as the global economy slows substantially.

The study concludes that central banks should continue their efforts to keep inflation under control since it is possible to do so without causing a worldwide recession. However, it will demand coordinated action from a range of policymakers.

This may serve to stabilise inflation expectations and lessen the amount of tightening required. Central banks in advanced economies should be aware of the consequences of monetary tightening on other countries. They should tighten macroprudential rules in emerging market and developing economies and increase foreign exchange reserves.

The effects of monetary policy on growth can be amplified as a result. Additionally, decision-makers should implement dependable medium-term economic plans and offer vulnerable households specific assistance.

To effectively combat inflation, additional economic decision-makers will need to take substantial action to increase global supply.

What Does The Evergrande Group Debt Crisis Mean?

In recent times, the global financial landscape has been shaken by the unfolding crisis surrounding the Evergrande Group, a Chinese conglomerate with interests spanning real estate, finance, and other sectors. This crisis has sparked concerns not only within China but across international markets. In this article, we will delve into the intricacies of the Evergrande Group debt crisis, exploring its root causes, potential implications, and the ripple effects it has sent through the global economy.

Understanding the Evergrande Group

The Evergrande Group, once hailed as a symbol of China’s booming real estate sector, is now grappling with a monumental debt crisis. Founded in 1996, the company quickly expanded its operations, becoming one of the largest property developers in China. With ambitions beyond real estate, Evergrande ventured into electric vehicles, healthcare, and other sectors, accumulating a vast empire.

Causes of the Debt Crisis

Several factors have contributed to Evergrande’s current financial quagmire:

Aggressive Expansion and Debt Accumulation: Evergrande’s rapid expansion into various sectors led to a significant accumulation of debt. The company borrowed heavily to fund its ambitious projects, resulting in a debt burden that became increasingly difficult to manage.

Real Estate Market Changes: The Chinese government’s efforts to curb property speculation and control housing prices impacted Evergrande’s core real estate business. Stricter regulations and increased scrutiny on property developers added to the company’s financial strain.

Diversification Challenges: Evergrande’s foray into sectors like electric vehicles and healthcare strained its resources and diverted attention from its core competencies. The company faced challenges in effectively managing these diverse ventures, leading to financial instability.

Cash Flow Constraints: Evergrande offered high-yield investment products that promised attractive returns. However, the company struggled to generate sufficient cash flow to meet its obligations, resulting in a liquidity crisis.

Implications for Evergrande and China

Domestic Impact: The Evergrande crisis could lead to layoffs, unpaid suppliers, and halted projects, causing a ripple effect in the Chinese economy. A potential real estate market downturn could affect homeowners and exacerbate economic challenges.

Financial System Stability: The sheer size of Evergrande’s debt – estimated at hundreds of billions of dollars – poses a systemic risk to China’s financial stability. Concerns have arisen about potential contagion to other financial institutions.

Government Response: To prevent a widespread financial crisis, the Chinese government faces the delicate task of managing Evergrande’s fallout. Authorities must strike a balance between ensuring stability and holding companies accountable for their financial decisions.

Global Ramifications

The Evergrande crisis extends its reach beyond China’s borders:

Global Markets Volatility: The uncertainty surrounding Evergrande has already triggered volatility in global financial markets. Investors are wary of the potential spillover effects, leading to fluctuations in stock markets and commodity prices.

Supply Chain Disruptions: Evergrande’s ventures into electric vehicles and other sectors have created global supply chain linkages. Disruptions in these ventures could impact industries reliant on these supply chains.

Investor Confidence: The Evergrande crisis prompts a reevaluation of corporate governance and risk management practices. Investors may become more cautious about investing in companies with high levels of debt and unclear business models.

Steps Toward Resolution

Debt Restructuring: Evergrande could engage in negotiations with creditors to restructure its debt, potentially converting some liabilities into equity or extending repayment timelines.

Asset Liquidation: Selling off non-core assets could help Evergrande generate much-needed cash to meet its obligations and stabilise its financial position.

Government Intervention: Chinese authorities might intervene by orchestrating a controlled resolution to prevent a disorderly collapse. This could involve a coordinated effort to manage the impact on creditors, homebuyers, and the broader economy.

Conclusion

The Evergrande Group’s debt crisis serves as a cautionary tale about the perils of unchecked expansion and excessive borrowing. Its implications stretch beyond China, unsettling global markets and supply chains. As the Chinese government and Evergrande’s leadership work to find a solution, the world watches closely to see how this crisis will unfold and what lessons can be learned from it. In a rapidly interconnected global economy, the fate of one company can reverberate far beyond its borders, underscoring the need for prudent financial practices and regulatory vigilance.

New Laws Introduced in Dubai to Support Business

New laws mean any law which becomes operative or effective subsequent to the Effective Date and shall include any City laws, ordinances, resolutions, rules or regulations. This is a key event set to take place in Dubai and will be a major focal point of the agenda of most corporations doing business in the emirate or looking to do business in it.

The emirate remains a main attraction for foreign investments especially the ones looking to benefit from its location, business, and legal environment and world-class infrastructure, to access the region. This was further validated by the United Arab Emirates’ ranking in the ease of doing business, where it was positioned 11th, according to the World Bank annual ratings in 2019.

This accomplishment is a reflection of the government’s ongoing work to promote a business environment that is diverse and sustainable.

A number of efforts have been made to diversify away from dependence on oil, creating a very strong services sector – one that fosters a competitive business environment. A major aspect of such an environment is a supportive and effective legal framework for businesses, on par with international standards, hence the recent changes and additions in UAE’s regulatory and corporate sector.

Among major changes that are expected to push the growth and progress of the local economy in Dubai are the implementation of UAE Federal Law No 19 of 2018 on foreign direct investment and the subsequent positive list of activities issued by the UAE Cabinet.

The FDI Law now allows up to 100% foreign ownership in more than 122 economic activities across 13 sectors including, transport and storage, agriculture, space, manufacturing industry, renewable energy, hospitality and food services, among others.

These sectors will offer new economic opportunities for international investors to explore in the UAE, particularly for projects involving e-commerce logistics, research laboratories, advancement in biotechnology, logistics and supply chain, production of solar panels, hybrid powerplants and green technology.

The refreshed list of privileges for companies established under the new FDI Law are extensive and includes treatment as local companies, as well as the removal of restrictions on repatriation of profits and any proceeds from liquidation or sale of a business.

Employees of FDI companies can now transfer their salaries, indemnities and entitlements outside the UAE. In addition, FDI companies are guaranteed the confidentiality of technical, economic, financial information, including investment initiatives. There are now no restrictions on the sale of a business, admission of new shareholders or change of legal form and structure.

In addition to the FDI Law, the UAE published two major laws in 2016 that will have a direct impact on the creation of a comprehensive legal and regulatory regime for the operations of corporations. These include the UAE Federal Law No. 9 of 2016 on bankruptcy and UAE Federal Law No. 20 of 2016 on the pledge of movable assets as a guarantee for debts.

The Bankruptcy Law deals mainly with the various structures for bankruptcy and liquidation of assets for distressed corporations, including restructuring and composition procedures.

Meanwhile, the Law on Pledge of Movable Assets allows the pledge of certain movable assets by corporations and the establishment of a special register to handle the registration of such pledges in favour of third parties. This law, in particular, is of extreme importance as it gives a lot of flexibility to corporations and allows them to secure proper funds while guaranteeing the financing parties’ rights.

Further and in November 2019, the UAE Cabinet passed a new Federal law No 19 of 2019 on Insolvency of Natural Persons that applies to debtors that are not subject to the Bankruptcy Law.

This new law applies to individuals who are in default of payment or facing difficulties in meeting their financial obligations. it is expected that the Insolvency Law will increase transparency in the dealings between financial institutions and individuals and address situations of defaults in a way that will enable all parties to safeguard their rights.

All of the above laws combined have created an overall framework to regulate the environment under which companies in the United Arab Emirates are operating and have considerably elevated the maturity and complexity of commercial transactions, as well as prospects of new and innovative investments.

This will also complement the efforts that are being pursued on other fronts, such as the development of world-class regulations for the protection of intellectual property rights, fighting cybercrime, promoting fintech initiatives and reinforcing the partnership between free zones and local authorities.