CEO sentiment points to “steady-as-she-goes” economy. More chief executives of America's largest companies plan to add workers than just three months ago, according to a new survey of 141 CEOs conducted by the Business Roundtable. (Axios)

Congress wants to further limit US investment in China. A bipartisan House committee on Tuesday released a landmark report arguing the U.S. needs to "reset" its economic relationship with China, including much more extensive investment restrictions. (Axios)

Zelenskyy hails ‘victory’ as EU agrees to open membership talks for Ukraine. European Council President Charles Michel says agreement a ‘signal of hope for their people and for our continent.’ (Al Jazeera)

Why maximizing revenue isn’t a CEO’s only job. Ex-Unilever chief Paul Polman tells In the City blindly following shareholders can leave companies “bankrupt before you knew it.” (Bloomberg)

No rate cuts ahead in Europe: Two global central banks strike contrast with Fed. Central banks in Europe and the U.K. kept interest rates at historically high levels on Thursday, while officials pushed back on expectations that borrowing costs would be lowered anytime soon. (Axios)

“High intensity” phase of Gaza war needs to end within weeks, Sullivan tells Netanyahu. Israel's war in Gaza needs to "transition to the next lower intensity phase in a matter of weeks, not months," White House national security adviser Jake Sullivan told Prime Minister Benjamin Netanyahu and members of the war cabinet in a meeting on Thursday, according to two U.S. and Israeli officials. (Axios)

Finland set to again shut its entire border with Russia. The decision comes amid renewed asylum seekers arrivals that Helsinki has labelled a Russian hybrid attack. (Al Jazeera)

Historic COP28 deal agrees to ‘transition away’ from fossil fuels. Delegates at the UN conference agree to ‘historic package’ of climate measures, although ‘phase out’ phrase omitted. (Al Jazeera)

US announces hundreds of new sanctions in push to isolate Russia. New sanctions target entities and individuals around the world in bid to isolate Russia as its war on Ukraine continues. (Al Jazeera)

Biggest economic threat in '24? Geopolitics. The biggest economic threat next year comes from geopolitical bad actors "who with one action can upset economic and market assumptions globally," a new survey of 500 institutional investors finds. (Axios)

Why Argentina’s shock measures may be the best hope for its ailing economy. The painful economic steps that Argentina’s new president, Javier Milei, announced this week sound draconian: Slashing the currency’s value in half. Reducing aid to provincial governments. Suspending public works. Cutting subsidies for gas and electricity. Raising some taxes. (AP)

Growth of autocracies will expand Chinese global influence via Belt and Road Initiative as it enters second decade. China currently faces daunting challenges in its domestic economy. But weakness in the real estate market and consumer spending at home is unlikely to stem its rising influence abroad. (The Conversation)

Higher Interest Rates Testing Banks in Middle East, North Africa and Pakistan

Thomas Kroen, Troy Matheson, Thomas Piontek, IMF Blog

Central banks will likely keep interest rates higher for longer in economies with persistently elevated core inflation (excluding food and energy prices). The high-interest-rate environment, which recently triggered banking sector stress in some advanced economies, could be a harbinger of more systemic risks. It could tighten financial conditions, trigger credit stress, and reduce funding for financial institutions, including in the Middle East, North Africa and Pakistan. Such stress could threaten bank profits and willingness to lend, materially impacting financial stability and economic growth.

Financial stability risks such as a high reliance on external funding can leave banks in some countries vulnerable to sudden changes in investor sentiment. In addition, where lenders hold a significant share of domestic sovereign debt, a lengthy period of higher interest rates could lead to losses, particularly if the market value of that debt declines and the assets are at a lower price.

In our recently published Regional Economic Outlook for the Middle East and Central Asia, we detail the first region-wide stress test. It uses four scenarios to assess the risks of higher-for-longer interest rates in the region’s emerging market and middle-income countries and the six Gulf Cooperation Council economies.

The results suggest banks across most countries in the region would be able to withstand individual stress scenarios, but could be tested by a combination of higher interest rates, corporate sector stress, and liquidity pressures. Importantly, state-owned banks are more vulnerable than privately-owned banks. This is due to the lower profitability and higher securities holdings of state-owned banks, which raise interest-rate risk.

Few banks would breach minimum regulatory capital ratios in the combined shock scenario. Still, less capital would likely result in reduced lending to the private sector and a decline in economic activity, which is comparable to previous episodes of credit contraction. For example, the inflation-adjusted economic output loss in the combined shock scenario could be as high as 1.5% over two years. The estimated loss for the Gulf economies would be 0.9%.

Monetary policy is an important factor in these countries. Central banks are facing difficult policy tradeoffs at a time when measures of core inflation, which exclude volatile food and energy prices, remain above target in many countries.

In a low-inflation environment, central banks can respond to financial stress by cutting interest rates. However, when inflation is high during periods of stress, policymakers must balance safeguarding financial stability and keeping inflation under control.

Policymakers need appropriate tools to tackle banking sector turmoil that could impact financial stability. Strengthening prudential standards—for example, by encouraging banks to accumulate capital during expansions so that they can sustain lending during downturns—can better manage risk. Vulnerabilities from bank holdings of government debt should be accounted for in stress testing to improve resilience to shocks. Over the next few years, efforts by policymakers to foster a deep and diversified investor base to help reduce the interconnectedness between the health of the banking system and the sovereign should continue, especially where state-owned entities dominate the marketplace.

Establishing emergency liquidity tools, such as central bank emergency lending, to stem systemic financial stress is also critical. However, governments should communicate clearly to ensure that liquidity support is not perceived to be working at cross-purposes with monetary policy. Finally, developing effective plans to wind down firms in distress would reduce risks to financial stability and economic growth.

This blog is based on Chapter 3 of the October 2023 Middle East and Central Asia Regional Economic Outlook, Higher for Longer: What Are the Macrofinancial Risks? The report authors are Adrian Alter, Bashar Hlayhel, Thomas Kroen, Troy Matheson (co-lead) and Thomas Piontek (co-lead).

This article originally appeared on IMF Blog.

Week in Review Editorial Team:

Annacaroline Caruso, editor in chief

Jamilex Gotay, editorial associate

Kendall Payton, editorial associate