Adapting to high stakes – Newspaper Kommersant No. 45 (7490) of 03/17/2023

Higher rates could become the “new normal” after a decade of relatively cheap money, warned attendees at a financial sector conference in Riyadh. Economists expect the countries of the Persian Gulf to maintain high growth rates, while for other states, the appreciation of capital will be more noticeable, both due to the high debt burden and the possible emergence of “new surprises” like the bankruptcy of Silicon Valley Bank.

Rising rates by leading central banks due to high inflation will mean the end of the era of “cheap money” – this is the main trend for financial markets, said the participants of the conference of the financial sector, held in Riyadh. Saudi Finance Minister Mohammed al-Jadaa said he viewed the bankruptcy of Silicon Valley Bank as a “warning signal” of a significant amount of unrealized losses due to depreciation of securities against the background of rising rates and a possible deterioration in the situation with the debt burden in many countries. The authorities of the country expect that this will not interfere with attracting foreign investors to new sectors of the economy, and note a decrease in the dependence of the budget on oil – since 2016, the share of non-oil revenues has increased from 10% to 35%. Among the companies of the Russian Federation, builders and IT solution providers are showing to the local market.

Monetary tightening also exacerbates the divergence in growth rates between regions – investors expect high rates to continue in the Gulf countries, as well as in India and Indonesia, while a rise in capital prices could negatively affect both developing countries with a high debt burden and developed ones. The head of the board of directors of Credit Swiss Group AG, Axel Lehmann, did not rule out an increase in corporate taxes in Europe, and the head of State Street management company Ronald O’Hanley – “new surprises” in the financial markets due to the accumulated excess liquidity over the past ten years at close to zero rates.

According to Seth Carpenter, chief economist at Morgan Stanley, the main issue remains the transition to higher rates as a new normal. In his opinion, the Fed will not cut rates this year, they will remain at the level of 5-5.25% at least until the end of the year (the forecast provides for two rate hikes by 0.25 percentage points in 2023). In the countries of the euro area, the situation with inflation is even more difficult due to expectations of rising prices during the next heating season. At the same time, the bank expects accelerated growth in China.

Harvard economics professor Kenneth Rogoff, on the other hand, expects China’s GDP growth to slow down if the traditional growth drivers—infrastructure and real estate investment—were exhausted. The economist also noted that the rules by which the 2008-2009 financial crisis was resolved are now inapplicable, the question of the required rate level for a stable reduction in inflation is open – but it is already clear that the traditional recipe, lowering rates and increasing access to liquidity, is not available. By themselves, high rates affect not only the banking sector, he noted.

Fitch Ratings Chief Economist Brian Coulton expects a recession in the US in the second half of the year and growth of 0.8% in the euro area, which will avoid a recession, as well as a Fed rate hike not only in March, but also later (the ECB has already tightened policy – see below). material on this page). “The Fed cannot yet boast of success in the fight against inflation, its current decline is associated with a decrease in energy prices, while inflation in services is growing – this indicator is more important, as it is associated with the state of the labor market,” the expert points out. He expects the Fed to split its policy of dealing with market volatility by providing liquidity and continuing to fight inflation by raising rates.

In parallel, the development of digital assets also affects the financial system. “Regulators are approaching this cautiously so far, also because their role requires strong technological competencies that state agencies do not always have. However, in the future, digitalization will dramatically increase the transparency of the market,” said former British Finance Minister Philip Hammond. John O’Neill, head of digital assets at HSBC, noted that cryptocurrencies and stablecoins still need more regulation, but this direction is wider than “just trading crypto assets.” In particular, digital assets can significantly reduce the role of SWIFT – in the US, the topic is discussed, including in the context of weakening regulators’ control over international capital flows.

Tatyana Edovina