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By : Sadek Al-Rikaby

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If you think that 2008 crises will not be repeated and banks are well hedged, you are wrong because we are living in fear of a real recession.

The decline in oil prices by more than 70 percent has reduced profits of energy companies to more than 60 percent in some cases and increased the burden on financial markets. Moreover, China is still in a critical transition phase from an industrial economy to one relying on service sectors.

The slowdown in China’s industrial production and the negative performance of its financial market has affected other economies as well.

The industrial production and export data are still weak in the United States, despite higher wages and the decline of the unemployment rate to 4.9 percent.

Europe faces the same situation. Industrial output in Germany has decreased in December by 1.2 percent, which is the second decline in a row despite reduced unemployment rate and less energy costs.

Emerging market revenues were also affected by lower commodity prices and the Fed decision to increase interest rate. This could push these markets to restructure their economies and reduce the dependence on exports and foreign investment in favour of supporting local economies.

International trade could be one of the big victims. IMF forecasts slower growth rate in global economy from 3.6 percent to 3.4 percent this year and from 3.8 percent to 3.6 percent next year, 2017. The United Nations also expects a declining growth rate in development economies.

Energy equation

The drop in profits of energy companies and the deficits in emerging market economies have reduced banks’ revenues in many countries.

Investments in most developed economies remained below the level it used to be before the financial crisis in 2008 and declined in five countries during the past five years.

Foreign investments also fell to $1.23 trillion in 2015 at a rate of 16 percent compared with 2014.

The negative impact of oil prices have decreased assets value of energy companies which banks have been adopted as collateral loans. In 2015, the debts of oil companies amounted to $72 billion, while it will reach $85 billion in 2016 and $129 billion in 2017.

This has prompted major U.S. banks to add loan reserves when announcing profits of last year’s fourth quarter.

The decline in oil prices by more than 70 percent has reduced profits of energy companies to more than 60 percent in some cases and increased the burden on financial markets

Sadek Al-Rikaby

According to Standard & Poor’s, oil and gas bonds are 31 percent of U.S. distressed debts in January and the banks credit line estimated to be at 30 percent after reaching the limit of 10 percent last November.

A number of international banks have cut jobs, reduced the number of branches and become more cautious in lending.

In the United States, the federal reserves rose from $200 billion in 2000-2008 to $1.6 trillion in 2009-2015, which indicates that the banks have reduced lending and tended to hedge policy.

This led to more pressure on the global growth and forced Bank of Japan to adopt a negative interest rate to encourage lending and move the troubled economic wheel.

However, we must distinguish between large banks, which own large financial reserves, and smaller regional banks which have been affected by lower revenues.

But in the face of these challenges, the banking sector is in real threat and could halt many projects around the world and lead, more or less, to a possible recession.

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Sadek Al-Rikaby is the director of The International Centre For Development Studies in London. His twitter handle is @Sadekrikaby

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Disclaimer: Views expressed by writers in the Column section are their own and do not reflect RiyadhVision’s point-of-view.

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