The leaders of the world's most important economies met last week in London and agreed on measures to combat the global financial crisis, and to prevent similar problems in the future. That, at least, is the general belief about what happened. What we should understand now is why the gathering was necessary in the first place and what type of "wish list" the world's leaders agreed upon. I say "wish list" for, as we know, actions or policies reported as agreed upon for public consumption (and confidence-building) and those actually put into effect may be quite different. A discussion of what was agreed upon can, however, help us form a realistic view of what the real outcome of the G20 was, and what it may mean for our personal finances.
It has only recently become abundantly clear that the world economy had some very fundamental financial problems that were causing global wealth to shrink at an alarming rate, and those problems continue apace. The prices of virtually all types of assets have fallen over recent months, many at frightening speeds. Most of the world's stock markets lost an average of 50 per cent of their value, taking some indices back to levels not seen since 1998. Imagine that - 10 years of values going nowhere. To make matters worse, investors who were doing what they were supposed to do - adding to their portfolios on a regular basis - have lost money by buying at higher average levels throughout that period.
Adding insult to that obvious injury, most property markets experienced sudden and accelerating falls from recent peaks. Since debt was used to finance 70 per cent to 90 per cent of the purchase price of many properties, those investors lost all, and in some cases more than all, of their initial investment. Indeed, thanks to banks' aggressive lending policies, many investors in the majority of the largest property markets were able to borrow up to 125 per cent of property purchase prices. Of course, we know that many of those lending policies were flawed and played a role in fomenting the economic crisis.
Continuing this depressing scenario, central banks, by attempting to do everything in their power to prevent, or at least slow, the falls in asset prices, sent cash deposit rates tumbling, the net result being that the two most popular investment vehicles - property and stocks - had lost value significantly and cash offered very low future returns. It became clear that as a result of this massive wealth destruction, banks that had lent record amounts against those past asset values were in significant financial trouble and as such could not only not lend any additional money, but needed to rein in past lending.
That was the past, the confluence of events that resulted in the London parley. Now for the future, namely, how the discussions and resulting decisions made last week will likely affect expats investing in global markets. The six directives below are our guidelines, for their ramifications will certainly trickle down to your wallet: 1) Free trade with fair and consistent regulation 2) Support growth and jobs in a sustainable fashion
3) Strengthen financial institutions and restore the flow of credit 4) Avoid a retreat into financial protectionism. 5) The financial system must: support "sustainable growth", "discourage excessive risk-taking", "limit leveraging", and "extend regulation or oversight to all financial markets, instruments and institutions, including hedge funds". 6) Governments should "take action to identify non-cooperative jurisdictions, including tax havens, and stand ready to deploy sanctions".
So how will living in the UAE most likely be affected? We live in a country with a cash-generating economy, as opposed to one that has developed a need to consume cash. This means that any need for the UAE to spend less as a country will have minimal effect on the local economy (that said, a reduction in investment from abroad will still affect us - and it has during the past 12 months - most noticeably in Dubai).
The need for effective regulation is being addressed daily by the Government, and a significant amount of additional regulation will need to be implemented, the fledgling freehold property market perhaps offering the best example. As is always the case, we see the cracks in a financial or regulatory system only when a downturn hits. The positive effect of such changes will be to help foster a more sustainable property market - and although that won't suit those who recently bought at inflated levels, it will prevent any return of the rampant property price inflation of 2007/2008
Banks are another area where we will likely see more controls and perhaps more effective supervision - it is not unfair to suggest that the experiment with self-regulation has failed. Borrowing will be more difficult in order to prevent some of the past excesses from recurring. To provide "sustainable" growth, banks will be forced to follow less aggressive lending policies. They will also have to be more cautious when looking at underlying asset values - most obviously in the case of loans taken against property.
Developers seeking finance will have to follow far more conservative assumptions if they or investors in their developments require bank finance. This means that we are unlikely to see another property boom. A call to avoid a retreat into financial protectionism is perhaps the most challenging. Would a UK bank with a significant UK government shareholder be inclined to lend to a non-tax paying expat to help purchase a Dubai property? Or would it be more inclined and directed to lend to a first-time buyer of UK property? How this plays out stands to be very interesting.
It could lead to an "effective" withdrawal of foreign-owned banks from the property finance market. If this happens, it would be advisable to develop an ongoing relationship with a local bank for any future financing needs. The regulation of hedge funds into which many UAE residents and expats alike invest at least some of their savings may well drive such funds out of London as they seek more tax-friendly havens with less regulatory supervision, a move that could create additional risk for such investors. If, on the other hand, a fund remains in London or other western capitals, it is a good bet that more regulation will result in lower investment returns. If you are investing in such funds, do look out for any changes in fee structures or jurisdiction.
Tax-havens were roundly attacked at the G20. More stringent disclosure will be enforced in popular tax havens such as Switzerland, Monaco, Luxembourg, the Isle of Man and Jersey. Expats who have accounts in such jurisdictions should think carefully about what actions they might wish to take, for while these areas will fight to the bitter end to maintain their present advantages, you would be wise to be prepared in advance for such changes. The major international accountancy practices, many now with full offices here in the UAE, may be able to assist you.
Whether the recent G20 Summit achieves any of its aims will be seen during the next few years, but it is a sure bet that anything that comes from it will have profound effects on UAE residents. Michael Small is a partner with VSM Wealth Consultancy in Dubai. Write to him at elliott@mailme.ae
