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Author: 
MOHAMED A. RAMADY
Publication Date: 
Tue, 2011-01-04 01:15

Key risk and stress points will be mainly driven by
geo-politics and the policies of governments as they move forward in 2011 with
their exit strategies from the financial crisis. Other issues that could
destabilize the markets will center on the decisions made by the US concerning
its fiscal stimulus policy, as well as resolving some of its foreign exchange
and trade disputes with China. 
Other contributing destabilizing factors will be the fallout over euro
zone sovereign debt issues, as well as possible cracks in the coalition
government in the UK over their austerity programs. The Korean situation will
continue to play hot and cold, but outright war is not expected, given that
both Koreas have made their point through belligerent mutual destruction
threats. For the GCC region, stock markets will continue to trade within narrow
ranges, with the exception of Qatar, where World Cup investment euphoria will
propel another round of investment flows and a rise in Qatar inflation.
The Saudi stock market will still see bouts of short term
euphoric rallies, followed by sharp retail selling to close 2011 at around the
7400 levels, a situation that will continue until more long-term institutional
investors dominate the market and foreign investor participation. Saudi Arabia
will also try to contain domestic inflationary tendencies driven by food
prices. Oil prices will still trade within the preferred Saudi band of $75-85
per barrel, despite the current $90 plus levels spurred by the unusual winter
conditions in Europe and the US. The recent rise in Chinese interest rates to
stem Chinese inflation is putting a question mark on further Chinese growth,
and oil producers will not wish to be a contributing factor in slowing down any
signs of economic recovery in struggling western economies.
The wider Middle East will still have to deal with the
outcome of the recent Egyptian parliamentary elections, Lebanese domestic
concerns and ongoing stalemate on Iran's nuclear program. These factors will
create a drag on foreign bank long term lending to the region, but there will
be a pickup in credit to the hitherto neglected but promising economic sectors
such as the small and medium sized enterprises (SME's), as countries such as
Saudi Arabia focus on employment generation through SME's.
Politics then will still define what is possible in the
financial markets in 2011, but the art of politics and compromise will be
tested in periods of stress. The G20 managed to patch over some fundamental
differences in its November 2010 meeting in Korea, and it will be interesting to
see if the high level meetings planned in 2011 between the US and Chinese
leaderships will repair some of the rifts or merely cement over them. Global
financial power, especially the rate of surplus savings, has shifted to the
developing economies such as China and oil exporters, while fiscal deficits and
low economic growth has bedeviled the more advanced economies. While the issue
of protectionism might raise its head during 2011, this will not be a major one
unless a drastic rise in unemployment affects some advanced economies, and the
political  pressure to impose
tariffs against exporting, mostly Asian countries, becomes too difficult to
withstand.
Food price inflation could become a major issue for
countries with large capital flows, and other emerging markets that are net
food importers, and there could be some interventionist government policies to
ease on imported food inflation by imposing price controls, or even outright
restriction of exports of some "strategic" food commodities, echoing
2008/2009 food price hikes. For the Gulf and Saudi Arabia, 2011 will continue
to witness investment initiatives in agro-food industries and securing supply
sources in countries that have excess production capacity.
The euro zone's financial woes will not go away in 2011,
and while Ireland was the latest to fall through the eye of the financial
storm, there are signs that continued negative market sentiment and downgrades
of euro sovereign bonds might herald further massive euro bailouts, putting the
leading Euro creditor nation – Germany - under political pressure to continue
supporting the euro project as is, or to look at alternative models. Any
weakening of German resolve will put pressure on fragmented coalition and
minority governments in Europe such as Ireland and Portugal. Although Italy's
Berlusconi narrowly won his vote of confidence, he now has less freedom to
operate than before, adding to more uncertainty in the financial markets. Other
European countries, currently below the headline financial radar, might
contribute to yet more financial market jitters, with Belgium with a debt/GDP
ratio of 100 percent and still no government, probably a leading candidate. This
compares with Saudi Arabia's 10 percent debt/GDP ratio.
The British pound could come under renewed pressure in
2011, as the Conservative- Liberal-Democratic coalition government spreads pain
for all though expenditure cuts, but with some in the UK seeing these policy
measures as not necessarily equal pain for all. The UK could be set for more
trade union and other activists' disruptions. The first true test of public
reaction will come in May's 2011 local elections in England and Wales and the
referendum on electoral reforms, with the Lib Dems expected to lose out amongst
young voters due to their perceived negation on national election pledges on
tuition fees.
While most analysts in the Middle East concentrated on
the fallout and shifting domestic balance of power in the US between Democrats,
Republicans, Tea Party and independents, and whether this provided a clue for a
more partisanship or bi-partisanship US government, there has been little
analysis of the evolving Chinese governing structure, which has important
implications for the global markets in 2011. Basically, the Chinese are handing
over power to a fifth generation leadership from the current fourth generation
leadership that has steered China on the world stage of being a global economic
power. In October 2010, the Chinese Vice President Xi Jinping was appointed to
the additional role of vice-chairman of the Central Military Commission, a move
that could signal his likely confirmation as President Hu Jintao's likely
successor.
The likely succession date is still far away, sometimes
between October 2012 and March 2013 when the party meets, but the transition
will be smooth as in the previous period of 2002-2003.
In the interim, the Chinese will continue to enhance
their 12th Five Year Plan which ends in 2015, and introduce market oriented
interest rate reforms and enhance a market-based managed floating exchange rate
regime.
The recent raising of Chinese domestic interest rates is
one indication of this policy to allow interest rates play a more important
role in credit markets. The implication is that China could attract some
foreign capital flows, especially from joint venture projects who will invest
surplus capital in China, compared with investing in low yield western
economies, depending however on Chinese inflation rates and the real rates of
return on Chinese investment.
The financial markets will continue to fascinate and
scare us in 2011 in equal measure, as the fallout of the 2008 financial crisis
lessons are still being digested, but with no easy answers facing the key
players....
 
— Mohamed A. Ramady is a former banker and currently a visiting
associate professor, finance and economics at King Fahd University of Petroleum
and Minerals, Dhahran

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