GF: How do you see the status of the US economy in the next 12 months?

Bullard: I think the US economy is in good shape for a soft landing. To me, soft landing means that output grows at the potential growth rate, that the job market is in pretty good balance, and that inflation is moving back toward target and isn’t too far from target. All those things are happening. And you know, GDP growth looks to me like the run rate is maybe between 2 and 2.5 percent for 2024, that’s pretty close to the potential growth rate, or a little above the potential growth rate. Inflation has been coming down toward target, and that’s going to enable the Federal Reserve to get going on the interest rate cuts.

GF: Do you then expect a rate cut in September?

Bullard: The committee was pretty clear at the last meeting and in the chairman’s press conference, that they are ready to go at the September meeting, unless something really dramatic happens. I think, you know, they’re about as clear as you can be for a central bank. I do think they’ll start in September with 25 basis points, and then the question is how fast do they want to move to get back toward a more-or-less restrictive stance of monetary policy, and so even when they lower the policy rate a little bit, the policy rate will still be restrictive. They have to continue to lower from that point. And I think it’s probably 25 basis points per meeting for several meetings in a row, until you can get down to a lower level of the policy rate, and then at that point, you could decide whether inflation is continuing to go to 2% or not, and whether you want to continue to normalize the policy rate.

GF:  You see a cut of 75 basis points between now and December, right?

Bullard: Right.

GF: Do you expect big policy differences depending on who will win the US presidential elections in November?

Bullard: One thing I’ve said about this, is that this election does have a lot of uncertainty around it, because not just the White House is up for grabs in a close election, but also the House of Representatives and the Senate are very close. It’s not clear to me that either party will be able to win all three of those. I think divided government is a distinct possibility for the ultimate outcome. And in the US when there’s divided government, that usually means not too much gets done. And usually financial markets like that outcome. And so, I think that that’s been a factor that’s been driving financial markets during the summer here, but the election could change direction very quickly and either party, I would say, could still sweep. If one party sweeps, it will be able to do more, and probably wants to do more. And so that would be a little bit different.

GF: How do you explain the market crisis we had on August 5^th?

Bullard: I would say that the dramatic sell off in US equities and global equities was partly due to the jobs report in the US. But if you look at that report, it was weak, but it was not that weak. I think what really exacerbated the downturn was events in Japan over the weekend and into Monday morning.

I think the [Bank of Japan] is trying to pull back some on its policy. It’s a very dovish policy that’s been in place for many years and, you know, attitudes have changed in Japan some, where they now think that a too weak yen is maybe counterproductive.

And I think that upset some of the carry trade that has been based on the idea that Japan will never do this.  I think that’s what caused the big sell off, especially in Japan. I think the US jobs report was over interpreted, and then that was all exacerbated by the Bank of Japan.

GF: Why are financial markets so stressed?

Bullard: The geopolitical risk is very serious, and I do think we’re living with the [Gaza and Ukraine] wars going on, but they could easily metastasize into larger conflicts, either one of them, and markets do worry about that and that could be a big risk.

I think also maybe more pedestrian is just that the market is up a lot. The equity market is highly valued in the US and … I think that makes people nervous. They think that, you know, maybe those are overvalued, and the air will come out of that level. So, in that sense, they’re right to worry about that, and right to worry about these great companies, but do we really want to value them as how these were valued?

GF: Are you talking about a company like Nvidia?

Bullard: Nvidia, would be a classic, you know, classic one that went way, way up this year. You know, it’s a great company, and they’ve got a great product, and they’re selling a lot of it, but what’s the right valuation, I think, is the question.

GF: How do you see the global economic landscape beside the US?

Bullard: I would say the global landscape is less rosy than the US, because you’ve got China, which I think is struggling, at least by Chinese standards. China is struggling, not growing as fast as they used to. They’ve got clear fundamental problems in their real estate market, maybe elsewhere, and then Europe, which has not had as much growth as us, and has the war going on in Ukraine and has been more tied to, at least the leading economies have been, more tied directly to China. So China slowing down, it’s very clear more than the US. I would say that for global growth, it’s not as clear that we can get the kind of numbers that we’ve had in recent years. It’s a little bit slower there, and there’s more recession risk there than in the US economy.

GF: Do you expect trade tensions, and the decoupling between China and the US continuing?

Bullard: I think both parties in the US have decided that a more protectionist stance on global trade is something that they want to pursue. One of the hallmarks of the Biden administration was that it didn’t really reverse any of the policies of the Trump administration with respect to trade, and I would expect that to continue going forward.

[The attitude toward global trade] fundamentally, it’s more protectionist. It’s less globalist than it would have been even a few years ago, or certainly during the Reagan-Bush years. And I don’t see that turning around. I think we’re going to have more volatility from that dimension going forward, and I’m a little concerned that you could have markets anticipating a trade war even before one actually occurs because both parties, both political parties are talking about getting tougher on tariffs, maybe not only China, but everyone in the world. That would invite retaliation or threats of retaliation that could lead to a lot of volatility.

Though RBI has collaborated with seven countries to link the Unified Payments Interface (UPI) for bilateral payments, this is the first time it has joined a multilateral project, and will connect a potentially large user base
to UPI.

Project Nexus is designed to connect the Faster Payment Systems of four Association of Southeast Asian Nations (ASEAN) countries—Malaysia, the Philippines, Singapore, Thailand—and India and has the potential to add more countries. The five participating countries will be the founding members and first movers of this platform, and have signed an agreement with BIS to this effect in Basel, Switzerland.

The recently completed third phase of Project Nexus involved the participation of the central banks of the four ASEAN nations, domestic IPS operators, and Bank Indonesia, which has special observer status. As part of its fourth phase, RBI will also join the project.

The platform creates an affordable instant payment system, serving as an alternative to global instant payment players that have high transaction costs. It aims to lower costs and expedite international remittances between countries, promoting financial inclusion, economic integration, and scalability, thereby contributing to the G20 Roadmap for Enhancing Cross-border Payments.

Project Nexus standardizes domestic IPS connections, allowing operators to make one connection to Nexus instead of custom connections to each country. Thus, the IPS is connected to all the countries in the network.

To manage the live implementation, the participating central banks and IPS operators will work toward establishing a new entity called the Nexus Scheme Organization, owned by central banks, the IPS operators or both. Finally, BIS will move toward a technical advisory role to enhance cooperation among its members and participants.

Already one of the wealthiest regions in the world, the Gulf Cooperation Council states are solidifying their status as a hub for global fortunes. According to Boston Consulting Group, the region’s financial wealth is expected to grow by 4.7% annually by 2027, reaching $3.5 trillion, up from $2.8 trillion in 2022.

“While global growth overall is moderate, the GCC is one of the fastest-growing regions and stands at the forefront of global wealth accumulation,” says Abdulla Al-Sada, senior executive vice president of QNB Group Asset and Wealth Management, a unit of Qatar-based QNB Group, the MENA region’s biggest financial institution by assets and the first lender to have established private banking in the emirate. “We are working on an ongoing basis to further enhance and uplift our holistic wealth management offering for our sophisticated and demanding clientele.”

For private wealth managers, the region offers attractive opportunities. The GCC already hosts hundreds of private banks, asset management firms, and family offices, including global leaders like Edmond de Rothschild, Goldman Sachs, and BlackRock. Each month, new firms enter the market.

In December, Farro Capital established a presence in Dubai’s International Financial Center (DIFC). For Rajiv Garg, senior executive officer of the Singapore-based multi-family office, expanding into the Middle East was a “no-brainer,” as “the region’s family office market is projected to exceed $1 trillion by 2026” and offers “a perfect blend of traditional wealth as well as newly minted billionaires and unicorn founders.”

In the past, local entrepreneurs and families typically sent their money to private banks in Switzerland or Luxembourg for safekeeping. According to a recent report by Strategy&, the global strategy consulting arm of PwC, over 70% of the region’s private wealth is currently held in offshore accounts. But today, GCC clients have a new priority: passing wealth to the next generation.

“In recent years, we’ve see a paradigm shift with the increasing importance of generational wealth transfer, tech entrepreneurs and family offices, especially in the United Arab Emirates and Saudi Arabia,” says Antoine Chemali, CEO of BNP Paribas Wealth Management Middle East, who has been working with the region’s families since the 1970s. 

By 2030, an estimated $1 trillion of assets is expected to change hands in the Middle East. Local legislation has evolved to facilitate this process. For many GCC families, which have amassed vast fortunes primarily from oil and gas over less than a century, this will be the first major generational wealth transfer. For asset managers, it is a chance to offer custom-made services.

“We see ourselves as an extension of these families, where we act as their de facto family office with full-service offerings,” says Garg. The goal is to redefine the way families manage their wealth, enter their trusted inner circle, and “guide them in preserving and compounding their assets for generations to come.”

Industry experts anticipate that the new generation will bring a different set of goals to the task than their forebears.

“They will expect innovative financial solutions, digital instruments, sustainable wealth management solutions, and diversified investment products across asset classes globally,” says Sana Al-Hadlaq, senior executive director of Wealth Management at Kuwait’s Kamco Invest, one of the largest asset managers in the region with over $16 billion assets under management. “They expect their wealth managers and institutions to provide them with global reach and access across different markets and asset classes. Investments should comprise all asset classes, including alternative investments with superior returns along the dimensions of private equity, venture capital, and real estate,” says QNB’s Al-Sada.

While reaching across the planet, these younger clients will also be keeping much more money at home.

“International investment remains attractive, but there is a growing trend of these clients retaining a more significant portion of their assets in the region,” says Michel Longhini, group head of Global Private Banking at First Abu Dhabi Bank, the UAE’s largest bank. “This trend has been one of the key drivers of growth and diversification of private wealth management in the UAE and the GCC countries as governments have introduced more robust regulatory frameworks and initiatives to encourage the establishment of local investment companies.”

PwC forecasts the regional wealth management industry growing faster than the global average, reaching $500 billion in onshore assets by 2026, up from $400 billion in 2022, creating significant opportunities for local players to step up their game.

Besides fortunate heirs, the GCC has also become a destination for the globalized wealthy. According to the Henley Private Wealth Migration Report, the UAE has seen the largest influx of millionaires in the world since the pandemic, drawing 4,000 to 5,000 new residents annually from countries like India, the UK, Pakistan, Nigeria, and China. These migrants seek a safe haven to park their fortunes but also new business opportunities and a luxurious lifestyle, according to Vipul Kapur, head of Private Banking at Mashreq, one of the UAE’s largest private banks.

To attract new high-profile residents, GCC governments have adapted their conservative legal systems, introducing reforms to labor laws, residency programs, golden visas, and new ownership rules for property and businesses.

“The UAE and other GCC countries have implemented regulatory reforms to build a more robust financial environment, draw investment, and unlock their dynamic economies,” says Longhini. In 2023, FAB Private banking reported 14% year-on-year revenue growth and a 22% increase in assets under management, thanks mainly to new client acquisition.

New money is expected to keep flowing into the GCC this year. The UAE’s removal earlier this year from the Financial Action Task Force’s “grey list” of countries working to address deficiencies in their regimes for countering money-laundering and terrorist financing promises to further boost investor confidence. In Saudi Arabia, a policy requiring foreign companies to establish regional headquarters in the kingdom to do business with the government is likely to attract new fortunes eager to tap into the MENA region’s largest market.

Private wealth and asset management has traditionally been dominated by international financial institutions, but local ones are rising to the challenge, especially in regions where the new wealthy are proliferating. For some, this means forming partnerships.

“We have built strategic alliances with international partners,” says Al-Hadlaq. “We complement the value offered by Western financial institutions by providing them access to the best opportunities and services here.”

Other local managers prefer to compete for the best products and services.

“We need to differentiate through specialized services, customer experience, and innovative solutions,” says Mashreq’s Vipul Kapur. “This means adapting to new technologies, managing security risks and meeting customer expectations for seamless digital experiences.” 

Competition fierce in digital products and fintech, where AI is expected to open new horizons.

“This will challenge us to rethink the way we do business and operate,” says QNB’s Al-Sada. “These technologies will transform the entire asset and wealth management industry from the front to the back office, with an emphasis on personalization and increases in productivity.”

With both local fortunes and international client bases growing, the outlook for GCC asset managers that can seize the opportunity is positive. New technologies may even help them catch up with global industry leaders more quickly than anticipated. As regulatory environments continue to evolve, the region is looking forward to a surge in financial innovation, including blockchain technologies and green finance initiatives, further solidifying its role in the global financial ecosystem.

As they grow in sophistication, GCC asset managers are also increasingly looking to take their homegrown expertise beyond their borders and expand into new markets across Africa and Asia, where they aim to tap into emerging nodes of high-net-worth individuals.

Amid a global landscape characterized by sluggish growth, soaring interest rates, and inflationary pressures, the six Gulf Cooperation Council states stand out for their resilience. Growth across Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, Oman, and Bahrain is expected to reach 3.7% this year, soundly outpacing the 2.9% global average, according to consulting firm PwC.

Western lenders and financial institutions are responding by strengthening their presence in the GCC as they scale back elsewhere.

“The GCC has increasingly become an attractive region for banks and investors,” says Antoine Chemali, CEO of BNP Paribas Wealth Management Middle East, which has over 600 employees in the UAE, Saudi Arabia, Bahrain, and Qatar. “The rise of the financial sector in the region creates demand on not only individual needs but also corporate banking and financial solutions.”

With most markets in the region outperforming their global peers, Rola Abu Manneh, CEO of Standard Chartered UAE, Middle East and Pakistan, says the GCC is contributing significantly to her bank’s strategic expansion strategy and its operating income growth.

“We are strategically targeting all markets across the GCC, tailoring our approach to each to leverage our strengths and meet the unique financial needs of our clients,” she says. “[Our] primary focus is on markets such as Saudi Arabia, the UAE, and Qatar, which lead the region’s economic diversification, with abundant opportunities in infrastructure, tourism, and the digital economy.”

Boasting a business-friendly environment and liberal policies, the UAE emerged as a financial hub two decades ago with the creation of the Dubai International Finance Center in 2004. Today, the free zone welcomes over 2,000 companies, including such international banks as HSBC, Royal Bank of Scotland, and JPMorgan Chase. In 2023, Dubai’s Financial Services Authorities registered 117 new firms, a 25% increase from 2022.

More recently, Dubai has become particularly attractive to asset managers and hedge funds, with applications from the latter group increasing 125% year-on-year. Newcomers include US-based Millennium Management and Wellington Management and Hong Kong-based WRISE Wealth Management.

Just an hour from Dubai, Abu Dhabi, the Emirati capital, has become the region’s latest magnet for international finance. Last year, 1,825 companies were registered with Abu Dhabi’s financial center, ADGM, up 32% from 2022. In recent months, Wall Street giants including Morgan Stanley and Goldman Sachs have set up shop alongside private wealth management firms, family offices, and fintechs eyeing investment opportunities as the region fine-tunes its transformation from an oil-rich desert to a global financial hub.

“I am excited about the opportunities,” says Oualid Lahsini, MENA CEO for Brevan Howard, one of the world’s largest hedge funds, which opened in Abu Dhabi’s free zone in 2023. “Engagement with Abu Dhabi and the broader GCC region is a key part of our long-term strategy. We are trading almost a third of our capital from the region.

The GCC economies’ growth over the last 50 years has created “an extraordinary stock of wealth for the public and private actors alike,” Lahsini notes. “Those actors are growing in sophistication and increasingly expect to be serviced locally.”

Saudi Arabia, the Arab world’s biggest market, is the next big thing on every banker’s mind.

The kingdom has revamped its financial sector as firms consolidated to create some of the region’s largest lenders and new legislation eases entry for foreign players. The authorities have adopted a carrot-and-stick approach; foreign firms are only allowed to sign deals with government entities—most deals, as it happens—on the condition that they establish regional headquarters in the kingdom. Effective this year, the rule appears to be working. Goldman Sachs received approval to establish itself in Riyadh in May; BlackRock, the Edmond de Rothschild Group, Deutsche Bank, and others are in the process.

Beyond its oil wealth, the GCC is boosting its attractiveness with a commitment to diversifying its economies. Each state has outlined its ambitions: Saudi Arabia, Qatar, and Bahrain with Vision 2030; Kuwait with Vision 2035; and the UAE with We the UAE 2031.

“The rise of the region is spearheaded by the UAE and Saudi Arabia,” says Chemali, both of which are attracting talent and capital with ambitious projects backed by strong support and investments from governments.

One facet of this drive is heavy investment in infrastructure projects. Notable examples include Neom, Saudi Arabia’s $500 billion futuristic city; Diriyah, Qiddiya, and Al-Ula, the kingdom’s tourism megaprojects; the UAE’s vast solar farms; Qatar’s North Field gas expansion, and the Gulf Railway, slated to connect all six GCC states.

“Financing infrastructure projects is key to creating jobs and opportunities across the region in the long run,” says Abu Manneh. “Encouragingly, GCC governments have adopted this long-term view, which has helped the pipeline of projects to remain strong.” International developers have also stayed engaged. Standard Chartered is among the international lenders providing diversified funding sources for projects including Neom and the North Field gas expansion.

While some critics argue these projects may be overly ambitious, substantial government backing makes them attractive to foreign investors.

“The region’s minimal funding requirements and significant inflows of foreign investment enhance its stability and allure for investors,” Abu Manneh notes.

In contrast to other parts of the world, the GCC’s transformation is powered for the most part by the Gulf states themselves through their large sovereign wealth funds. Often referred to as the “Oil Five,” Saudi Arabia’s Public Investment Fund; the Abu Dhabi Investment Authority, Mubadala Investment Company and ADQ in Abu Dhabi; and the Qatar Investment Authority are among the world’s largest and most active SWFs. The combined assets of the GCC’s 19 sovereign funds will reach $7.6 trillion by 2030, doubling from 2023 and the equivalent to the combined annual GDPs of the UK and Germany, according to industry tracker GlobalSWF’s 2024 annual report.

The GCC states are also leveraging deep financial-sector reforms to attract global investors. Many have introduced structural changes to their capital markets, leading to a surge in initial public offerings.

“The launch of innovative investment products, enhancements in post-trade infrastructure, and an increase in IPO activities have rendered the market more vibrant and approachable,” Abu Manneh says.

According to EY, the entire MENA region saw 48 IPOs in 2023, raising a total of $10.7 billion. The most significant market debut was ADES, the Saudi oil and gas drilling firm, which drew $1.2 billion, followed by Abu Dhabi’s Pure Health with $986 million. Saudi Aramco’s 2019 IPO remains the largest in history, raising $25.6 billion. Tens more companies are expected to list in 2024 and several GCC members are planning to privatize state assets; Oman, for one, aims to sell shares in at least 30 state-owned companies over the next five years.

Promisingly, financial-sector reforms have spurred investment across more sectors than just energy, including tourism, new technologies, and artificial intelligence, the latter of which the GCC economies aim to be at the forefront. Saudi Arabia plans to create a $40 billion fund to invest in AI, and in April, Microsoft committed $1.5 billion to G42 following the announcement of the Emirati AI firm’s partnership with OpenAI. This flurry of activity promises to add legs to the GCC states’ robust non-oil sector growth of 4.3% in 2023.

There is more work ahead on the financial front, Lahsini says. “Local capital markets are still very dominated by the equity story,” he says, “and I believe more can be done to develop fixed income and credit markets and to provide local actors with more options to fuel the growth.”

That said, the GCC states are solidifying their position as an attractive destination for foreign capital, while consistent government support and substantial financial resources are paving the way for a growing influx of international financial institutions.

Another year, another bumper crop of profits. Banks in the six-member Gulf Cooperation Council (GCC) are set to reap further gains as higher oil prices, increased public-sector spending, and red-hot real estate markets combine to generate a heady lending environment. In the first quarter of this year, the combined profits of 57 listed banks jumped 10.5% to $14.4 billion compared to the same period in 2023, Kuwait-headquartered Kamco Invest said in a May report.

Quarterly performance was similarly robust, with an 11.8% surge in quarter-on-quarter profits.

But there are headwinds, including an expected change in monetary policy by the US Federal Reserve, mounting competition, and geopolitical uncertainty.

Meanwhile, banks in Saudi Arabia and the United Arab Emirates may face liquidity challenges as they scramble to meet strong lending demand driven by governments jockeying to liberalize their economies. That scenario could trigger renewed consolidation, some analysts predict, as GCC banks, with limited regional options, look to other jurisdictions to achieve operating efficiencies and cost savings.

GCC banks have been riffing off the Fed’s last monetary tightening cycle to support earnings; higher interest rates typically boost loan yields and fee income. At the end of 2023, the average return on assets of the region’s top 45 banks reached 1.7%, up from 1.2% at year-end 2021, according to ratings agency S&P Global.

With the exception of Kuwait, where the dinar is pegged to a basket of currencies, GCC governments peg theirs to the US dollar, and so they typically follow US interest rate changes to preserve their pegs.

Yet, a Fed move to lower may pressure some GCC banks. S&P estimates that every 100-basis-point rate drop corresponds to around a 9% reduction in bottom-line profits. The most vulnerable bank S&P rates may see as much as a 30% drop in the bottom line for every 100 basis point cut.

Despite the chances of an erosion in earnings, however, merger and acquisition activity among GCC banks has gone quiet since it reached a pre-pandemic peak in 2019 when 11 deals worth $118 billion were consummated, according to data from PitchBook. Last year saw few blockbuster deals, adding to speculation that a fresh burst of activity might be overdue.

While it is unclear when the Fed will begin reducing interest rates and by how much, when it happens, the shift could alter GCC banks’ risk profile. The good news is that rate cuts would reduce the number of unrealized losses that institutions in the region have built up amid frenetic lending. These might be as much as some $2.8 billion for rated GCC banks, or 1.9% on average of their total equity at year-end 2023, S&P estimates.

Still, lower profits are not the only consideration for banks when they weigh M&A to achieve cost efficiencies. In recent years, deals among the larger banks have been a shortcut to building market share. But it is widely acknowledged there are too many banks in local banking markets at a time of mounting competition from smaller, more agile rivals.

“Consolidation makes sense for overbanked systems in the region,” says Mohamed Damak, managing director, sector lead financial institutions, Middle East and Africa at S&P Global Ratings. “It can be even more appealing in an environment where interest rates and profitability are reducing.”

Regional banks’ appetite for international acquisitions that diversify them away from their home markets will drive M&A activity. “By deploying capital into high-growth markets, they may be able to compensate for weaker growth opportunities in their home markets,” Fitch Ratings said in May. 

Increasing competition from swashbuckling fintechs could also spur M&A. Challenger banks and neobanks have gnawed away at conventional banks’ market share and are a preoccupation of C-suite executives. Their continuing impact on profits may also spark consolidation, analysts suggest.

Fintech valuations, by contrast, are high, and that may limit outright acquisitions by conventional banks looking to take their rivals’ innovations in-house. Not all banks will be able to compete in the new environment, and governments will be mindful of any threat to systemic stability, says Hiba Chamas, business development director, Americas and MENA, at RTGS.global, a London-based cross-border settlements fintech.

“Regulatory pressures may play a significant role, with authorities mandating mergers to reduce the number of smaller, weaker banks and enhance financial stability in the region,” says Chamas. Smaller banks that lack capital to invest in fintech or build their own products may be compelled to merge with larger institutions, she suggests.

Some of the GCC’s larger banks have already bought into corporate marriages as a way to diffuse geopolitical risk and an overweight dependency on oil-related revenue. The UAE triggered an earlier flurry of M&A activity in 2016 when First Abu Dhabi Bank emerged from the union of National Bank of Abu Dhabi and First Gulf Bank, spurred by a desire to leverage scale and deliver cost synergies.

That deal was followed in 2019 by the tripartite merger of Abu Dhabi Commercial Bank, Union National Bank, and Al-Hilal Bank. Other notable GCC deals have included the creation of Saudi National Bank in 2021 through the merger of National Commercial Bank and Samba Financial Group, creating Saudi Arabia’s largest bank. Smaller deals have taken place in Bahrain, Kuwait, Oman and Qatar.

Today, several GCC banks are reportedly looking to acquire financial institutions outside of their domestic markets. But snapping up banks in lower rated jurisdictions could be problematic, warns Fitch Ratings. GCC banks already have substantial exposures in countries such as Turkey and Egypt, and further international expansion would come with uncertainties regarding foreign exchange and interest rate risk, according to Fitch.

Burgan Bank (Kuwait), Emirates NBD (UAE), Qatar National Bank and The Commercial Bank (Qatar) have all seen changes to their rating profiles as a result of exposure to Turkey. Qatar National Bank’s additional exposure in Egypt’s weak economy also makes it vulnerable to changes in the local macroeconomic environment. And Kuwait Finance House has a higher exposure to Turkey and Bahrain, Fitch notes.

Cross-border M&A within the GCC is complicated, too, given large government shareholders in some of the region’s major banks. Strong balance sheets and solid project pipelines reduce the likelihood of consolidation in the GCC, says Junaid Ansari, director of investment strategy and research at Kamco Invest, which could make deals outside the region more attractive. “Consolidation within the region would only be limited to the ongoing deals, but we expect to see an increase in overseas M&A deals by GCC banks.”

Tight liquidity, meanwhile, is resulting in prolific levels of US dollar debt issuance by GCC banks to fund soaring credit demand. Fitch calculates that annual issuance in 2024 and 2025 could exceed the 2020 record of $25.2 billion. With government initiatives including Saudi Arabia’s Vision 2030 and Dubai’s D33, which entail mind-numbing levels of spending, banks’ loose change for M&A might be constrained.

The GCC is also no stranger to Black Swan situations, and a sudden shock event might be enough to force or scupper M&A deals, dealing a blow to business confidence. Of primary concern would be a widening of the Israel-Hamas war or an escalation of attacks by Yemen’s Houthi rebels in the Red Sea. Especially if Iran is drawn into the conflict, the economic impact would be dramatic and possibly lead to a spike in non-performing loans.

“Were the scope of the Israel-Hamas war to widen significantly,” Fitch said in January, “Middle Eastern countries could be affected by further disruption to oil trade routes, or, potentially, production capabilities, and could also experience a marked negative impact on non-oil activity.” That would likely set back their plans for longer-term economic diversification, although higher oil prices could provide an offset.

As the GCC’s second-largest economy, the UAE looks particularly exposed. In 2020, it was a signatory to the Abraham Accords, normalizing relations with Israel. The emirates are now reportedly Israel’s second-largest trading partner in the Middle East, yet it is unclear what level of exposure UAE banks have to nascent bilateral trade.

These concerns are another reason some observers argue that the best bet for GCC banks, bolstered by their healthy balance sheets, is to diversify into markets outside the region, lowering risk and lessening their dependency on hydrocarbon-related income in a region known for springing surprises. 

Since assuming office at the peak of the republic’s inflation crisis in 2022, CNB Governor Aleš Michl has been implementing a unique and rather unorthodox strategy to combat price hikes.

First, he put a damper on further interest rate hikes, saying he would promote a well-communicated stance of higher rates for longer rather than the former “rushed, volatile, ad-hoc policy moves and experiments.”

Michl, formerly a co-founder of an algorithmic asset-management fund, went on a media campaign focused on lowering inflation expectations. By talking to Czech tabloids and through social media outlets including Instagram, Facebook, and X (formerly Twitter), he communicated to the public that the problem was a supply chain bottleneck that would reverse as soon as the post-Covid crisis demand for goods returned to normal.

The height of the campaign came when Michl appeared on a Facebook post by the CNB using a ketchup bottle to explain his analysis.

“It’s like opening a new ketchup bottle,” he said, “turn it over and nothing comes out, the ketchup is stuck in the bottle. This shortage of goods led to rising prices. When the problems in the supply chains are solved and demand normalized, there is a surplus of goods: similar to when the ketchup finally flows out of the bottle, but much more than you wanted.”

The other part of Michl’s plan was to strengthen the Czech koruna, on the theory that a heavy flow of euros into the economy at a higher price was partly to blame for the price increases.

Despite hitting the 2% inflation target twice in the last three readings, Michl still sees a long way to go before claiming victory over inflation. “My work will be judged by long-term results and not only by inflation numbers this year,” he predicts. The market, however, sees plenty of room for further rate cuts.

The Omani government is planning a levy ranging from 5% to 9%, but its application to citizens and expatriates will be different. Omani citizens will be taxed at a flat rate of 5% on their net global income above $1 million. Expatriates pay a tax on incomes exceeding $100,000, a move that is likely to be closely scrutinized by other Gulf states.

While Oman’s initiative could nudge other GCC countries toward similar reforms, immediate adoption seems unlikely, says Mazen Salhab, chief market strategist—MENA at BDSwiss. Saudi Arabia and the United Arab Emirates have indicated they have no plans to introduce income taxes. And Oman, for its part, “may face challenges in competing with its tax-free neighbors for skilled expatriates and international businesses.”

The logic behind the sultanate’s move is clear, however. Along with Bahrain, Oman’s economy has strained under the weight of a heavy debt burden that saw the ratio of public debt to GDP reach almost 70% at its peak in 2020. Austerity implemented under Sultan Haitham bin Tariq Al Said, Oman’s head of state, has since pushed it back to around 35%, according to London-based Capital Economics.

Earlier reforms aimed at tightening fiscal policy included the introduction of a 5% value-added tax in 2021, but the optics surrounding an income tax are likely to ripple through the GCC expatriate workforce. And its expected impact on Oman’s budget—adding just 0.2% to GDP by 2026, according to Fitch Ratings’ forecasts—is minimal. Still, an income tax would provide the government with an additional tool to diversify future revenue sources. The good news is that earlier cuts in government spending, combined with a determination to stabilize public debt, have had a dramatic effect on Oman’s budget position. From a deficit of nearly 20% of GDP in early 2021, it swung into a surplus of 2.5% last year, according to Capital Economics. 

In July, BYD—an acronym for “Build Your Dreams”— unveiled its new EV plant in Thailand, having reportedly investing $486 million to gain a foothold in what was until recently Southeast Asia’s second largest auto market. The plant, BYD’s first in Southeast Asia, has the capacity to produce 150,000 vehicles a year. BYD’s push into Southeast Asia was followed by a $1 billion investment in Turkey in a plant that can also produce 150,000 per year.

By choosing Turkey, BYD sidesteps punitive tariffs Brussels is about to levy on Chinese automakers. While not a member of the EU, Turkey enjoys a customs union with the bloc, which means BYD will be able to reexport vehicles to the EU without incurring a 27.4% tariff currently under discussion.

Tariffs and restrictive regulations are forcing Chinese automakers to reconsider their game plan, says Richard Lawton, head of marketing and communications at DriveElectric, an EV leasing and carbon management company.

“It’s likely that these tariff increases might influence the future decision-making processes of BYD as well as other Chinese manufacturers, especially when it comes to making strategic investments,” he notes.

BYD, in which Warren Buffett’s Berkshire Hathaway holds a 6.9% stake, also has Elon Musk in its crosshairs; it is set to surpass the Tesla in battery EV sales this year, research firm Counterpoint said in a July report. Chinese automakers are turning their attention as well to emerging markets in the Middle East and Africa, Latin America, Southeast Asia, Australia, and New Zealand, Counterpoint notes.

With US and European automakers struggling to compete, much will hinge on high-level trade talks. “The outcome of EU-China talks, especially with Germany’s opposition, will shape future EV market dynamics, with Europe [and] the US driving growth from 2025 onwards,” Counterpoint said in a statement. Elsewhere, BYD has its sights set on Indonesia, Southeast Asia’s largest auto market, having forged an alliance with domestically based Neta Auto to build a $1 billion factory set to become operational by 2026.      

Government debt has mushroomed in recent years, hitting 15.3 trillion pesos—around $264 billion in May—according to Bureau of the Treasury estimates. Manila reportedly plans to borrow a further $3 billion this year as part of a $5 billion bond program that began in May. The country’s debt-to-GDP ratio is currently in excess of 60%, the Treasury says.

The DoF recently held talks in Japan with Sumitomo Mitsui Banking Corporation and Nomura Securities as part of a roadshow to gauge interest from investors there. The final timing for the new bond issue is likely to be linked to the US Federal Reserve’s decision later this year on lowering interest rates.

The government has tapped Japanese bond markets before.

In 2018, the publicly held Japan Bank for International Cooperation acquired part of a multi-tranche ¥154.2 billion (roughly $1.39 billion) samurai bond offering by the Philippine government, data from the Treasury shows. The following year, it raised ¥92 billion (approximately $860 million) of samurai bonds in a three-tranche offering. And in 2021, it raised ¥55 billion in three-year, zero-coupon samurai bonds: its first-ever zero-coupon Japanese offering, which saw strong interest from investors.

But Manila’s latest return to the well has a larger political context. In early July, the Philippines inked a defense pact with Japan amid tensions with China over disputed territory in the South China Sea: further evidence that trade and finance have become intertwined with regional geopolitics.  President Ferdinand Marcos Jr.’s government is also courting investors to sustainably develop its nickel reserves to meet demand for the metal’s use in electric vehicle batteries. After Indonesia, the Philippines is world’s second largest producer of the metal, according to Statista. 

Less than a year ago, Ebrard, a high-profile political heavyweight who served as Mexico’s secretary of foreign affairs under outgoing President Andrés Manuel López Obrador (AMLO), was threatening to Sheinbaum’s and López Obrador’s Morena party to run for the presidency on his own. He had previously lost the 2012 race for the Moreno nomination to AMLO himself.

But after the landslide victory that will make Sheinbaum the first woman and first Jewish person to govern Mexico in its 200-year history, Ebrard took a step back and joined the governmental team.

The markets saw the choice as positive, given that Ebrard has a more moderate profile compared to Claudia Sheinbaum’s more left-wing stance. Since the new minister’s nomination, the Mexican peso has gained significant ground against most G7 currencies; Mexican stocks have also trended upward.

Among his duties, Ebrard will oversee the 2026 review of the United States-Mexico-Canada Agreement (USMCA), a pivotal moment that could shape Mexico’s economy over the next decade.

“There is a kind of protectionist consensus in the US,” he said in his first interview in his new post. “That’s why the review of the trade agreement with the US, and the trade relationship with [the US and Canada] in general, could be more complex.”

Ebrard will also need to manage China’s growing interest in Mexico, says Eduardo Ordóñez, an independent political and security risk analyst based in Mexico City.

“China is gradually investing in northern Mexico,” he notes, “diversifying its supply chains and trade routes along the border with the US. Keeping foreign direct investment growth, while maintaining a positive and cooperative relationship with the US and Canada will be the challenge.” Experts also expect nearshoring to be the key concern for Ebrard and Sheinbaum. To support growth in that area, Ordóñez says, he will need to “bolster investment to modernize infrastructure in ports, land transport, as well as help cargo carriers modernize their fleets.”