Concerns about the financial repercussions of the coronavirus crisis have largely faded since the first few hectic weeks. That’s a problem, because authorities should be doing much more to prepare for what could be a destabilising wave of losses.
In the face of the pandemic, the US Federal Reserve has done an excellent job of keeping financial markets functioning. It has pledged trillions of dollars to ensure that a broad range of institutions – including hedge funds, money-market mutual funds and securities dealers – can meet their immediate obligations. This has helped consumers and companies to borrow the money they need to stay afloat.
More than $1 trillion in mortgage debt – including an estimated $361bn on the balance sheets of private lenders – is in forbearance programmes.
At some point, though, the question will be not whether borrowers can keep borrowing, but whether they can afford the obligations they’ve taken on. Many in the US, for example, entered the crisis more indebted than ever.
As of March 31, non-financial corporate debt in the US stood at $10.5 trillion (Dh38.56tn), or 48.7 per cent of gross domestic product – the highest level on records going back to 1950. An unusually large share of that consists of bonds issued by companies with the lowest investment-grade ratings, or of so-called leveraged loans, to even riskier enterprises. Household debt stands at more than 75 per cent of GDP.
Much will depend on how soon the economy can return to normal. But as movement restrictions cause borrowers to fall behind on payments, potential losses are mounting. More than $1 trillion in mortgage debt – including an estimated $361bn on the balance sheets of private lenders – is in forbearance programmes. The share of car loans and credit cards in hardship stood at an estimated 7 per cent and 3.7 per cent in May, up about 18 and 180 times, respectively, from a year earlier. Defaults on the estimated $1.2tn in leveraged loans are up more than threefold.
When the reckoning comes, the crucial question will be where the losses are concentrated. The government will absorb some, given that it guarantees most mortgage loans and has put up $454bn to backstop the Fed’s emergency lending programmes. Beyond that, if losses accrue primarily to investors who can afford to take the hit, then the effect on the broader economy might be limited. If they end up on the balance sheets of systemically important financial institutions that lack the equity capital to absorb them, they could trigger distress that would worsen an already deep recession.
In the 2010 Dodd-Frank Act, Congress mandated regular stress tests to assess the largest banks’ exposures, tasked the Fed with ensuring that they built up enough capital to weather severe downturns, and adopted the Volcker Rule to curb speculative risk-taking. It also created the Financial Stability Oversight Council and the Office of Financial Research to monitor vulnerabilities outside the banking system and prod the relevant regulators to address any shortcomings.
Unfortunately, these regulators never made full use of their powers, and have more recently given up ground. The Trump administration slashed funding for the OFR and the FSOC, and scrapped efforts to subject systemically important non-bank institutions to added scrutiny. The Fed allowed – and is still allowing – the largest banks to deplete their capital by paying out money to shareholders. Stress tests merit little confidence. The latest round offered only a broad sense of banks’ vulnerability to the current crisis, with no information on individual institutions. Also, just this week, regulators completed a gutting of the Volcker Rule and further eased requirements aimed at maintaining banks’ resilience.
Preparing for the next crisis will require fixing some fundamental weaknesses. For one thing, the US should stop subsidising debt. Time and again, crises have demonstrated that excessive leverage makes economic shocks more damaging. Yet the government still encourages it – for example, by providing tax breaks for interest on mortgage loans and corporate borrowing, and by providing an almost unlimited backstop for the short-term debts of financial institutions. Eliminating or constraining such preferences would make the whole economy more resilient.
Officials must also address some more immediate vulnerabilities. The Fed should encourage banks to pause dividends and accumulate equity, and prepare for an emergency round of rigorous stress tests. The Treasury should reactivate the OFR and the FSOC to help ensure losses on leveraged loans don’t trigger more widespread contagion, insurers and large hedge funds don’t become weak links and mortgage markets keep functioning.
The 2008 financial crisis was particularly damaging in the way it undermined people’s faith in a political establishment that proved woefully unprepared. By taking responsible steps now, policymakers can ensure the coronavirus pandemic doesn’t bring about a repeat.
* Bloomberg
Day 5, Abu Dhabi Test: At a glance
Moment of the day When Dilruwan Perera dismissed Yasir Shah to end Pakistan’s limp resistance, the Sri Lankans charged around the field with the fevered delirium of a side not used to winning. Trouble was, they had not. The delivery was deemed a no ball. Sri Lanka had a nervy wait, but it was merely a stay of execution for the beleaguered hosts.
Stat of the day – 5 Pakistan have lost all 10 wickets on the fifth day of a Test five times since the start of 2016. It is an alarming departure for a side who had apparently erased regular collapses from their resume. “The only thing I can say, it’s not a mitigating excuse at all, but that’s a young batting line up, obviously trying to find their way,” said Mickey Arthur, Pakistan’s coach.
The verdict Test matches in the UAE are known for speeding up on the last two days, but this was extreme. The first two innings of this Test took 11 sessions to complete. The remaining two were done in less than four. The nature of Pakistan’s capitulation at the end showed just how difficult the transition is going to be in the post Misbah-ul-Haq era.
Muslim Council of Elders condemns terrorism on religious sites
The Muslim Council of Elders has strongly condemned the criminal attacks on religious sites in Britain.
It firmly rejected “acts of terrorism, which constitute a flagrant violation of the sanctity of houses of worship”.
“Attacking places of worship is a form of terrorism and extremism that threatens peace and stability within societies,” it said.
The council also warned against the rise of hate speech, racism, extremism and Islamophobia. It urged the international community to join efforts to promote tolerance and peaceful coexistence.
The specs: 2018 Nissan Patrol Nismo
Price: base / as tested: Dh382,000
Engine: 5.6-litre V8
Gearbox: Seven-speed automatic
Power: 428hp @ 5,800rpm
Torque: 560Nm @ 3,600rpm
Fuel economy, combined: 12.7L / 100km
Ten tax points to be aware of in 2026
1. Domestic VAT refund amendments: request your refund within five years
If a business does not apply for the refund on time, they lose their credit.
2. E-invoicing in the UAE
Businesses should continue preparing for the implementation of e-invoicing in the UAE, with 2026 a preparation and transition period ahead of phased mandatory adoption.
3. More tax audits
Tax authorities are increasingly using data already available across multiple filings to identify audit risks.
4. More beneficial VAT and excise tax penalty regime
Tax disputes are expected to become more frequent and more structured, with clearer administrative objection and appeal processes. The UAE has adopted a new penalty regime for VAT and excise disputes, which now mirrors the penalty regime for corporate tax.
5. Greater emphasis on statutory audit
There is a greater need for the accuracy of financial statements. The International Financial Reporting Standards standards need to be strictly adhered to and, as a result, the quality of the audits will need to increase.
6. Further transfer pricing enforcement
Transfer pricing enforcement, which refers to the practice of establishing prices for internal transactions between related entities, is expected to broaden in scope. The UAE will shortly open the possibility to negotiate advance pricing agreements, or essentially rulings for transfer pricing purposes.
7. Limited time periods for audits
Recent amendments also introduce a default five-year limitation period for tax audits and assessments, subject to specific statutory exceptions. While the standard audit and assessment period is five years, this may be extended to up to 15 years in cases involving fraud or tax evasion.
8. Pillar 2 implementation
Many multinational groups will begin to feel the practical effect of the Domestic Minimum Top-Up Tax (DMTT), the UAE's implementation of the OECD’s global minimum tax under Pillar 2. While the rules apply for financial years starting on or after January 1, 2025, it is 2026 that marks the transition to an operational phase.
9. Reduced compliance obligations for imported goods and services
Businesses that apply the reverse-charge mechanism for VAT purposes in the UAE may benefit from reduced compliance obligations.
10. Substance and CbC reporting focus
Tax authorities are expected to continue strengthening the enforcement of economic substance and Country-by-Country (CbC) reporting frameworks. In the UAE, these regimes are increasingly being used as risk-assessment tools, providing tax authorities with a comprehensive view of multinational groups’ global footprints and enabling them to assess whether profits are aligned with real economic activity.
Contributed by Thomas Vanhee and Hend Rashwan, Aurifer
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
