What’s been going on in the world this week? LAUREN MCAUGHTRY brings you an update of the most significant economic, regional and global events, issues and trends that have the potential to affect the Islamic finance industry.
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Germany falls into deflation for the first time since 2009, driven by the plunge in oil prices, joining a host of European countries struggling to handle the slow recovery, and lending support to the European Central Bank’s substantial quantitative easing program.
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European ministers held an emergency meeting in Brussels this week to decide on further Russian sanctions, but failed to come to an agreement; with opinions divided especially following the recent election of a left-wing Greek government keen to consolidate ties between the two regional blocs. What impact will the conflicted European policy have on fuel demand?
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US Federal Reserve under pressure as it refuses to say when rates will rise. “The combination of global economic weakness and a rising dollar has sparked a reduction in the odds of tighter policy arriving this year, according to the bond market,” according to the FT. The concerns cast doubt over the positive economic data emerging from the US.
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The election of Syriza in Greece threatens European stability. Will Greece be forced to leave the European Union, as its leader Alexis Tsipras demands an end to the austerity measures that left Greece crippled in the wake of the global financial crisis? And if Greece’s debts are forgiven (as suggested by stakeholders including the IMF) what impact will this have on Europe’s political landscape as more radical national parties realize they can hold the coalition to ransom to avoid economic justice?
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African economies including Nigeria are suffering under the low oil prices, with Africa-focused funds seeing major losses. Nigerian banks are seriously struggling to manage the crisis due to their large exposures to the oil sector (ranging from 17-40% according to Coronation Fund Managers), suggesting bad times ahead.
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Volumes of asset-backed securities (including mortgage-backed securities) have reached their highest levels since 2008, increasing by 16% to US$314 billion this year according to Dealogic. Driven by a boom in demand from Asia, which has seen issuance triple, these high-risk assets (the misuse of which was instrumental in causing the global financial crisis) are once again causing concern – especially in the shaky Chinese economy which seems to be shoring up its wobbling markets with risky securitizations as the value drops out of its property sector. Increased appetite for alternative assets is natural given the low bond yields but is there a real cause for concern given China’s current property crisis? Is history about to repeat itself, but with a new global player in the starring role?
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China is officially the world’s biggest economy, but its economy is causing concern with a lowered growth forecast of 6.8% the slowest in 15 years. The Chinese real estate market, which has high levels of credit and offers serious potential for debt crises, is causing very real fears in the global economy.
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China’s problems are having knock-on effects in other markets. Emerging economies including India, Africa and Sri Lanka are suffering from its credit concerns. Much of their growth and development in recent years have been funded by Chinese investment – the Sri Lankan government last year estimated that Chinese state-owned banks held almost US$4 billion in loans and grants to Sri Lanka. What will happen to infrastructure growth in these growing markets if the Chinese bankroll stops paying out? – where will the investment come from, and is this an opportunity for Islamic institutions to step into the breach?
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Asia could benefit significantly from the lower oil prices, with net oil importers including Thailand, Mongolia, Sri Lanka, India, Indonesia, China, the Philippines, Bangladesh and Vietnam reaping the benefits, according to Fitch Ratings. However Malaysia, the only net exporter in the region, could see its competitiveness suffer if prices do not recover (see Chart 1).