Catarina's World

The G20 group’s discussions this weekend may lead to banks and other financial institutions having to pay two new taxes to fund future bail-outs. The global proposals by the IMF are “more radical” than most had anticipated.

“Too many Wall Street firms had no one looking over their shoulder, and they went off the deep end.”, Senator Charles E. Schumer of New York said. He has long been one of Wall Street’s best friends on Capitol Hill, but Mr. Schumer has embraced new legislation that will put constraints on his hometown’s leading industry.

Banks are likely to be horrified, especially about the proposed tax on pay.

Insurers, hedge funds and other financial institutions must also pay the taxes, the IMF argues, despite them being less implicated in the recent crisis. If not, activities currently carried out by banks would be reclassified as, for example, insurance or hedge-fund services to escape the levies.

The main focus is on the European Union and United States, where much of the financial crisis played out.

My feeling is that it is crucial to regulate complicated financial products that not even the people who invented them understand fully. A case in point are the subprime debt securities, not to mention the CDOs, sold in the United States and Europe that played a key role in the financial crisis. They were almost non-existent in Asia and a major reason why the region was able to recover more quickly from the global recession.

Good timing that a former Goldman CDO man just published a novel he wrote “about the cliched high life I had been living while creating and selling billions upon billions of these securitization and credit derivative products, now better known as ‘toxic assets”.

President Obama took his rhetoric of reform on Thursday to the nation’s financial capital in a high-profile foray to chide Wall Street bankers for their “reckless practices” and to press for tighter regulations meant to avert another financial crisis.

It is my belief that if there is no oversight and regulation of new complex financial products it is just a question of how long it takes before we have another global crisis. So I am pleased that the Senate approved legislation to tighten regulation of derivatives trading a couple of days ago. But will that be enough? We need similar legislation in Europe and the rest of the world. Debt securities based on life insurance instead of sub prime morgages have been sold for quite some time already. Let’s hope Wall Street isn’t, again, betting against them with a complicated CDO as well?

G20 countries have to find common ground on a variety of reforms to prevent a repeat of the credit crisis that led to a global recession. Otherwise operations will just move to countries where it is allowed. Do you think it will be possible to agree on regulations that make a difference? Or will financial companies just find loopholes and new ways of doing whatever is profitable.

Middle class spending is crucial for economic growth. So now, with Western middle classes in debt and distress, many economists look to the new emerging-market middle class as the foundation for a new era of global prosperity.

Middle class spending power per capita in the Gulf is, for some reason, often overlooked by Western companies.

Last year 70 million people in developing countries joined the middle class, with incomes between $6,000 and$30,000. It is estimated that within 20 years they will surpass their Western pears when it comes to global spending power. The focus is mainly on Asia and it is estimated that in about a decade they will pick up the slack left by overspent America. Emergency market spending is in fact already bolstering the balance sheets of many Western firms.

Needless to say the worlds is focusing on China and India due to its huge populations as well as rapidly rising economies and middle classes. Correct if you look at the amount of people. But by looking at the issue that way we overlook a very potent and prosperous group of people.

When it comes to per capita spending I’m certain that the middle classes in Saudi Arabia and the other Gulf countries not only earn more but also spend far more than their Asian counterparts. It’s not for nothing many middle class Indians chose to work in the Gulf, despite the fact that they are paid less than the locals. Salaries are higher and you pay no income tax in the Gulf.

Shopping is a top leisure activity and when the weekend starts the malls are filled with people who literally shop until they drop. A woman who works in a Chanel shop in the area told me an average customer spends an absolute fortune every time they come to the shop. And the same goes for more expensive items like cars, jewellery and electronics. Considering the importance the Chinese put on saving money, I would be very surprised if middle class people in China, with the exception of some mega rich, spend that much.

The world, certainly multinationals, are already managing the economic spending shift to Asia very well. But quite a few Western companies are forgetting about Saudi Arabia and the Gulf, which in my opinion could prove costly especially for companies selling expensive consumer goods.

A large amount of Asian and Middle Eastern households have incomes today that position them just below the global middle class threshold and so increasingly large numbers of them are expected to become middle class in the next ten years.

Emerging-market leaders know that the Western system created the worldwide boom of the last quarter century that ended when Lehman Brothers collapsed 18 months ago. Now the boom has moved to emerging markets, and their leaders will increasingly choose to alter Western models to suit their countries. Consequently the fact that all eyes are on Asia and the Gulf forgotten could turn out to be a fatal mistake. The new emerging middle classes are supporters of globalization but highly nationalistic. And there is a vast difference between nationalism in China and, say, Kuwait.

Back to emerging middle classes in general, we can conclude that the Chinese bought more cars than Americans last year, and that India has as many Internet users as the U.S. Also it is estimated that by 2030, more than nine out of every 10 mobile phones will be owned by people in the developing world. Coca-Cola actually forecasts a doubling of worldwide revenues to $200 billion over the next decade, thanks to another 1 billion people expected to join the middle class by 2020. So Western companies who haven’t yet focused on developing countries middle classes should jump on the band waggon swiftly and not overlook the Gulf.

(photo: flickr – Lars Plougmann)