Home Editor's Choice Geopolitical risks are altering the way we live!

Geopolitical risks are altering the way we live!

As you might have noticed, unlike the past two years, Professor Charmaine Gauci’s face was absent from our TV screens during the Christmas recess. Indeed, we all longed to spend a normal Christmas with our family and friends and without any covid-19 restrictions. However, we must not forget that 2023 is still an abnormal year.

We shall not ignore that not everyone around the world enjoyed a peaceful Christmas. Indeed, Ukrainians and other nationalities were unable to enjoy a peaceful Christmas. The war in Ukraine and other regional conflicts around the globe pushed civilians out of their homes, with many ending up either internally displaced or refugees in and around Europe’s borders.

Correspondingly, several people in Europe were also unable to enjoy Christmas due to financial restrictions emanating from the global economic instability, as they were either left impoverished to make ends meet or homeless on the streets. Undoubtedly, 2023 is the year that will define and seal the future of most of the global economies. As I promised in my last opinion piece, I intend to retain this weekly opinion piece to primarily examine the global geopolitical and economic risks.

When we look back to 2022, certainly the war in Ukraine left its marks. However, the economic repercussions of the war might leave deeper marks in 2023. Economists around the world are predicting a recession in 2023, with a mild recovery in 2024. Indeed, the Head of the IMF, Kristalina Georgieva is predicting that the US, China, and Europe will enter a period of economic recession. This means that third of the global economy might feel or enter an economic recession by the end of 2023.

Undeniably, the European Central Bank is also cautious on the risks emanating from the war. As part of its banking supervision priorities, the ECB listed three main priorities for 2023-2025 in addressing vulnerabilities in banks. The top priority relates to the strengthening of resilience to immediate macro-financial and geopolitical shocks. Certainly, the focus is on the credit risk and the shortcoming in credit management that includes exposures in vulnerable sectors, as well as the funding risks. The ensuing priorities relate to the digitalisation challenges and the stepping up of efforts to address climate change for material exposures to physical and transition risks.

Climate and Environmental risks are still a novelty in the banking and financial sector, and they were given priority in 2021 and 2022. Let us park climate change risks for a minute. The war in Ukraine altered the global economic and financial equilibrium and evidently the geopolitical risks are being given a priority. Geopolitical risks are quite complex relative to climate and environmental risks. Indeed, some big banks around the world employ geopolitical risk experts.

Last year I attended a conference in Brussels, and the panel consisted of a financial expert who delivered a presentation in relation to the geopolitical risks emanating from the war in Ukraine. After the conference we had a brief conversation, and we agreed that the war in Ukraine showed signs of becoming a protracted war with its economic affects lingering for quite a long time, especially inflationary pressures. Truly, we were also discussing security in my former capacity of Political and Security Committee representative. Honestly, I was impressed with the level of detail that we exchanged in relation to the geopolitical game and the associated financial risks. Prior to leaving the conference room we exchanged a business card, and at that point I released that the panellist’s expertise relate to a strong academic background in international relations, and two decades of professional experience in geopolitical risks covering the banking and financial sectors.  

Clearly, the banking sector must start looking for new talent; one that combines economics, diplomacy, and finance. There are not many in the market. Au contraire, the experts in geopolitical risks in the banking sector are rare. However, geopolitical risks, along with climate and environmental risks are the primary perils that we might be dealing with in the current decade. As already outlined, several economists around the world are predicting a recession. Plainly, a looming recession is attributed to high energy prices, interest rates hikes, food insecurity, as well as low business confidence and consumer spending. Indeed, food insecurity is connected both to the war in Ukraine, and severe droughts, especially in Africa, attributed to climate change. What we are currently experiencing around the world relates to exogenous shocks that nobody predicted when we were preparing to recover from the covid-19 pandemic. Sadly, inflation eroded most of the workers’ disposable income and countless citizens are suffering the economic effects of the Ukrainian war, especially the elderly.

Correspondingly, the war in Ukraine will change the way we live today. Whether we like it or not we are being pushed to adjust to the current needs, especially our consumption patterns. For instance, restricting overconsumption and transiting to more sustainable practices is not a distant concept anymore but a reality. Frankly, as an economist, I would prefer to promote the idea of stimulating consumer spending and private investment, as they are both important components of aggregate demand that enable policy makers to attain positive economic growth. However, the problem is also a supply side problem. And the exogenous shocks are mostly attributed to the restricted energy supply, the frenzy energy market as well as food insecurity. Given that energy prices skyrocketed, and in turn goods and services became dearer, automatically consumers shifted and are currently transiting to less expensive practices, especially on the recycling and upcycling of commodities. Also, whenever possible, consumers are changing their energy consumption patterns, sources, and limiting the corresponding consumption, at least on mainland Europe.   

Unquestionably, we must seize the opportunity to transit to more sustainable practices. However, we must exploit the concept of the circular economy further to reduce unnecessary costs. As I already explained in my preceding opinion pieces the primary concept of the circular economy is togetherness without breaking the cycle. Indeed, depositing and recycling beverage containers, be they plastic or otherwise, is a great initiative by the relevant authorities. The idea is to primarily reduce plastic pollution and limit the damage to the environment. However, the current system requires a big overhaul, as it is just a fraction of what can be executed under the circular economy.

Undeniably, the ten-euro cents deposit paid on each beverage container requires an effective and efficient implementation to avoid inflation expectations. Eventually, we must also get rid or limit as much as possible the printing of vouchers, as this is also breaking the cycle. What we need to ascertain is 2023 is the effective implementation of our capital and human resources, otherwise we risk losing an opportunity to retain our competitiveness.

Economic predictions have it that Malta will be avoiding an economic recession, as the government will carry on subsidising the energy inflation to retain competitiveness and stability. However, we must avoid occurrences that might risk harming our competitiveness, especially self-inflicted economic shocks in abnormal times. Obviously, the party in government must keep on monitoring the situation to mitigate future inflationary pressures and carry on assisting the needy. 

Lastly, I take the opportunity to wish my readers a Happy New Year.