26 June 2008
Speech by the Economic Secretary to the Treasury, Kitty Ussher MP, on Middle East Financial Centres and the Global Markets, to Chatham House, London, 26 June 2008
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Introduction
1. Thank you, Robin, for that introduction, and also for the invitation to be here.
2. It's always a privilege to have the chance to speak at a Chatham House event, given your history and reputation - and it is a pleasure to be here at the second event of your City series, following on from the Chancellor speaking at the first in April.
3. Today's event is about Middle East financial centres, and the global financial markets.
4. And the first point to make is that the two are now inextricably linked.
5. Across much of the Middle East recent economic growth has been rapid - 6.5%, according to the IMF, in 2007 and in 2006.
6. That growth isn't just confined to the oil producing countries, with the other emerging economies in the region also experiencing growth of over 5%.
7. But it is clearly impossible to discuss the emergence of Middle Eastern financial centres without talking about oil - which as we all know has increased in price from about $20 a barrel in 1998, to over $130 today.
8. That change is having a significant impact on the global economy.
9. The GCC earned over $380 billion from oil exports in 2007, and $26 billion from gas - and those figures will be even higher in 2008.
10. And that has helped to increase the value of the Middle East's sovereign wealth funds, which are an increasingly important source of capital - both here in Britain, and around the world.
11. The region's increasing wealth is also evident in the rapid growth of Islamic Finance, which is one of the most innovative financial services sectors around at the moment, with huge potential for the future. Gulf Islamic banks, for example, have an estimated $300 billion in Sharia'a compliant assets.
12. And the Middle East's financial centres are developing fast.
13. The most recent edition of the Global Financial Centres Index, for example, puts Dubai at number 24 - and it shows Bahrain and Qatar making the biggest jump in their ratings of any financial centre, compared to the previous year.
14. Today, I'd like to talk about how we here in the UK should respond to these changes - and my argument is very simply that we should embrace them.
15. There is nothing to be gained from trying to deny the increasing impact that the Middle East has in the global economy - but there is a huge amount to be gained from making the most of the opportunities that it presents.
Benefits of globalisation
16. The starting point for thinking about this should be that the Middle East's growing role in global markets is part of a wider trend for financial globalisation, which we have seen over a number of years.
17. Thirty years ago, the value of international trade in goods and services and international finance were almost the same; but now the level of international finance is seven times higher than trade.
18. The value of banks' assets and liabilities held abroad quadrupled from around $5 trillion to more than $20 trillion between 1990 and 2006.
19. And in the same period, the proportion of equities owned by foreign investors increased from less than 10% to 25%; and foreign ownership of government bonds rose from 11% in 1991 to 31% fifteen years later.
20. This increasing interconnectedness does present challenges; and the disruption that we have seen to financial markets since last summer has shown how quickly financial instability can now spread.
21. But turning towards the apparent safety of financial protectionism would not only fail to protect us from instability, but also deny us the very real benefits that we can gain by embracing financial globalisation, if we manage it correctly.
22. And there are huge opportunities here for economic growth; greater macroeconomic stability; and to contribute to other important international objectives - like speeding up development, and tackling climate change.
23. And so our approach here in Britain will continue to be to embrace globalisation, including the increasing role played by the Middle East and its financial centres, not to reject it - and to make the case for other countries to do the same.
Openness and internationalism
24. This is, in fact, the approach that Britain has taken for many years.
25. The City, in particular, has built its reputation on a long tradition of openness and internationalism - and we are determined to continue that.
26. That means being open to people from across the world.
27. We know the huge contribution that the talented people who come to work here make to our financial services sector in particular: around a quarter of senior managers in financial and business services here in London are born abroad.
28. And we want to attract the brightest and the best here to London, particularly now when our financial services sector is facing a challenging time.
29. That is one of the core purposes of our new points based migration system that we're currently introducing. Tier 1 of the system, for highly skilled migrants, has already gone live.
30. Just as with the previous system, those applying to work in the UK under Tier 1 will need to prove they can speak English and support themselves. But if they have enough points then they will not require a job offer to apply. And points will be awarded on the basis of the individual's skills, experience, age and past earnings.
31. For those who already do have a job offer, Tier 2 may be more appropriate, which allows employers to sponsor skilled migrants to work here if there is a shortage of local of EEA skills. The general requirement for Tier 2 is basic English, but for intra-company transfers - which is often the situation with our international banks - the migrant has three years to learn basic English.
32. So we don't think there is a problem. But because this is such an important area to get right, I'm pleased to announce that Liam Byrne, the Minister for Borders and Immigration, will on Wednesday next week, with me, meet representatives of large City employers, including foreign banks, to discuss how the points based system will work in practice and to make sure that we take on board any concerns at an early stage.
33. So, we will be continuing to welcome people from every country.
34. And the UK also continues to welcome investment from around the world: $1 trillion of Foreign Direct Investment for the first time last year, in fact, second only to the United States.
35. And an important part of that investment comes from sovereign wealth funds - many of them from states in the Middle East.
Sovereign Wealth Funds
36. These funds have been attracting an increasing amount of attention recently.
37. That is partly because of their rapid growth, fuelled in part by high oil prices.
38. But they have also been shifting their investment patterns towards equities, and making some high profile investments in financial institutions.
39. That investment is providing a mechanism for oil revenues to be reinvested, and providing capital to the global financial markets at a time when it is badly needed.
40. And here in the UK, we have been clear right from the start, and we have been consistent, that we welcome these funds.
41. We do need to do more to build trust between the funds and recipient countries - and that is why we are supporting the work of the IMF and the OECD to develop best practices for sovereign wealth funds and recipient countries.
42. But we will continue to resist calls to limit or restrict their investment.
43. Firstly, because they are an important source of capital - and they should, if they're acting commercially, be treated like any other investor.
44. And secondly, because limiting their investment will lower the incentives for oil producers to extract more oil today.
45. That would reduce the incentives for increasing oil supply, at exactly the time when we should be looking to increase oil capacity over the medium term.
46. So, I hope that sovereign wealth funds will continue to make the most of the City's huge expertise in managing assets, and its position as the ideal base from which to keep close to the world's financial markets.
47. And we will certainly continue to welcome them, including funds from the Middle East, here to the UK.
48. Again, our response will be an openness, and a willingness to embrace the opportunities that globalisation presents - not to ignore them.
Islamic Finance
49. Our approach is the same when it comes to Islamic finance.
50. This is another area with huge potential for London, and one of our objectives is to make sure that the City is at the forefront of the sector as it develops.
51. We also want to make sure that no-one has their choice of financial services limited by their religion, and to help ensure that Muslims have the same access to financial services as anyone else in Britain.
52. To achieve those objectives, we are determined to encourage the development of Islamic finance here in the UK.
53. So, we've been continuing with our efforts, over a number of years, to establish a level tax and regulatory playing field between conventional and Islamic finance.
54. We have delivered real progress here, most obviously with the removal of obstacles to Islamic mortgages and the introduction of a new tax framework to encourage corporate sukuk issuance.
55. And you can see the effects.
56. The Islamic mortgage market here in the UK is now worth more than £500 million; and the UK's sharia'a compliant banks have more than 40,000 customers.
57. We now have more banks providing Islamic financial services here in London than in the rest of Western Europe combined, and the only standalone Islamic financial institutions in the EU - and indeed just two days ago I was at the launch of Gatehouse, the UK's fifth standalone Islamic investment bank.
58. And there are now 18 sukuk listed on the London Stock Exchange, worth an estimated $13 billion.
59. That is impressive - but there is more to be done, and we are keeping up the momentum here, because the potential is enormous.
60. Over the coming months, for example, we'll be consulting about the application of Stamp Duty Land Tax to sukuk transactions, and the regulatory treatment of sukuk issuances.
61. Many of you will also know that we have also been looking closely at the potential of the Government itself issuing a sovereign sukuk, and we have also been consulting on this.
62. Of course, there are lots of issues to think about.
63. But we are proceeding as fast as we can, and earlier this month I announced that if we can get over the last barriers, then we would intend to issue a rolling programme of up to about £2 billion of Government sukuk.
64. I also announced that by the end of the year, we'll be publishing a document that outlines the approach we intend to take to develop both retail and wholesale Islamic Finance here in the UK, and to build on the progress that we've already seen.
65. So we are, once again, making the most of the opportunities that this new sector presents us with: both the opportunities to allow people to access financial services, and the opportunities for London to reinforce its reputation as the most, cutting-edge innovative financial centre in the world.
London's advantages for the Middle East
66. By doing that, I think that London can also demonstrate not only that it can seize the opportunities of the increasing role of the Middle East - but also the huge amount that it has to offer to the Middle East in return, because this can be a mutually beneficial relationship.
67. As I've said, we're determined to embrace the opportunities that the changes to the global economy present us with - and that openness goes a long way.
68. But our deep, liquid capital markets; our experienced, skilled workforce; and our unrivalled links with the rest of the global financial system obviously play a huge part in attracting investment here, including from the Middle East.
69. Those factors are crucial to London's reputation, and to its success - and indeed just a few weeks ago, this year's Mastercard Worldwide Centres of Commerce Index confirmed London's position as the world's leading centre of commerce. The Global Financial Centres Index that I mentioned earlier put it top too.
70. As ever, though, we can't be complacent about that position - which is why we are so determined to make the most of the opportunities that globalisation presents.
71. But to do that, we will always need a close relationship between the Government and the City.
72. The Chancellor's High Level Group, which was established two years ago, has played an important role in building up that relationship - we've learnt a lot from the opportunity that we've had to meet regularly with senior representatives of different organisations and major firms, and it's a partnership that I take incredibly seriously.
Conclusion
73. And we remain committed to that process - because London will, of course, need to continue to promote its advantages, and to develop them.
74. One of the ways that we will do that, and that we will maintain the City's position as the world's leading financial centre, will be to make the most of the opportunities that globalisation presents, as I've said today.
75. Many of those opportunities come from the role of the Middle East in the financial markets, which you are discussing at today's conference: the development of Islamic Finance, and the increasing influence of sovereign wealth funds in particular.
76. And here in the UK, we won't turn our backs on these opportunities - we will embrace them, and that will make us stronger, at the same time as benefiting the countries of the Middle East too.
77. This really can be a mutually beneficial relationship - and I hope that you will have the chance to talk today about how we can make the best of it.
78. Thank you for listening.