Global economy at a ‘dangerous juncture’ amid geopolitical challenges, World Bank says

The Israel-Gaza war, which has become a major humanitarian crisis, has created further uncertainty amid stubborn inflation and high borrowing costs

World Bank President Ajay Banga says there is a 'growing divergence' between developing and developed economies. EPA

The global economy is at a “dangerous juncture”, with geopolitical challenges such as the Israel-Gaza war expected to have an impact on economic development, the World Bank president has said.

Ajay Banga, who was speaking at the Future Investment Initiative in Riyadh on Tuesday, called for “peace and stability” and said there was a “growing divergence” between developing and developed economies.

The Israel-Gaza war, which has become a major humanitarian crisis, has created further uncertainty for a global economy that is feeling the effects of stubborn inflation and high borrowing costs.

Brent crude, the benchmark for two thirds of the world’s oil supply, has risen nearly 7 per cent since the start of the conflict on October 7.

“Risks tend to move around. I'd be very careful of fixating on one and ignoring the others right now,” Mr Banga said.

“Interest rates are probably going to stay a little higher for longer [and] the US 10-year Treasury Yield crossed 5 per cent briefly yesterday – these are areas we haven't seen,” he added.

“And then how long for the next pandemic? I’d be a bit careful trying to quantify risks.”

Earlier this month, the International Monetary Fund kept its global economic growth projection for this year at 3 per cent, slower than the 3.5 per cent expansion recorded in 2022, remaining below the historical growth average.

For 2024, the fund expects the global gross domestic product to expand by 2.9 per cent, a 0.1 percentage point downgrade from the fund’s forecast in July for next year .

The world “is in a better place today” despite the challenges, Mr Banga said, although he also warned about issues such as high debt levels and slow energy transition in emerging markets.

Global investments in energy transition technologies must quadruple to $35 trillion by 2030 to stay in line with commitments made under the Paris climate agreement, the International Renewable Energy Agency said in a March report.

Investments in renewable energy technologies reached a record $1.3 trillion last year but that figure must rise to about $5 trillion annually, the agency said.

Public Investment Fund governor Yasir Al Rumayyan. Reuters

“There is not enough money in government coffers, or even in the multilateral development banks. We do, at the end of the day, need to involve the people in the private sector with their capital,” Mr Banga said.

Also speaking at the FII event, Yasir Al Rumayyan, the governor of the Public Investment Fund and the chairman of Saudi Aramco, highlighted the importance of innovation and technology as the world grapples with slowing economic activity amid high interest rates.

“Central banks have tightened monetary policy in an effort to slow inflation. Business and governments around the world have been adjusting to this new reality,” Mr Al Rumayyan said during his keynote speech.

“This has been the fastest rate increase since the early 1980s and has caused significant and predictable disruptions.”

Artificial intelligence will shape global trade in “numerous ways”, and it will contribute to higher growth and productivity even in a high interest rate environment, Mr Al Rumayyan added.

Despite mounting geopolitical headwinds, threats to the global supply chain and higher interest rates that are affecting the world economy, Saudi Arabia is well-positioned to continue attracting international investments across various sectors, Minister of Investment Khalid Al Falih said at the FII event.

Many of the challenges actually play to the kingdom's strengths, he told delegates during a panel discussion along with investment ministers from India, Turkey, Morocco and Finland.

Saudi Arabia, which was the fastest-growing large economy last year, has one of the lowest costs of capital considering its risk premium on borrowing.

When investors around the world look for an investment destination, they want a stable country politically, economically and from a monetary standpoint, he said.

"Our investment thesis is set for the long term and we're not fluctuating from year to year and the investors from the kingdom also chip in a significant part of the capital in projects that also strengthen the kingdom's investment case," Mr Al Falih said.

"You can tick all of these boxes. In addition to the fundamental stabilities, we have the long-term investment equity story and we have also strong investors," he added.

"We have strong developmental banks in Saudi Arabia that can lend at very low interest rate that reduces the average cost of capital and therefore while we're still impacted by sustained interest rates.

"I think [the kingdom] presents investors an opportunity in Saudi Arabia that is perhaps better than many other competing locations."