The global economy is likely to decelerate further amid a longer-than-expected period of high interest rates before improving in the second half of next year, predicts Standard Chartered plc (StanChart) group chairman José Viñals.

“The global economy is likely to get softer before it gets better. However, I see this happening in a way that is not traumatic, so I don’t see a hard landing,” he tells The Edge in an exclusive interview during a three-day visit to Kuala Lumpur earlier this month, his first since the pandemic.

Having worked at the International Monetary Fund (IMF) prior to joining StanChart in October 2016 and becoming its group chairman two months later, Vinals has substantial experience and deep insights into economic, financial and political matters. 

A trained economist, he was the IMF’s financial counsellor and director of the monetary and capital markets department. Vinals was the IMF’s chief spokesperson on financial matters, including global financial stability. He was formerly the deputy governor of Spain’s central bank.

Here are excerpts of the interview. 

The Edge: You’re the oldest bank in Malaysia. In Southeast Asia, Malaysia is the second-biggest market for you after Singapore?

José Viñals: Well, we have Singapore, and we have Malaysia, and this is a market which has great potential. A number of things need to be falling into place for this potential to be fully developed. When we look at our business plan and the things we expect to do here, we [expect that] we would be growing our business here in a way which helps the Malaysian economy move forward. And we also expect that, in terms of government policies, all the different initiatives that have been recently launched by this new government, which is very energetic and determined at winning [over] people, we look forward to these plans materialising in a way that improves the ease of doing business and that allows the private sector to play a bigger role in a freer environment to do business. This is so that we can bring in the domestic and external investment that is needed to finance the New Industrial Master Plan and the National Energy Transition Roadmap, which requires most of the money to be coming from the private sector. The keyword among all this is ‘trust’. You need trust, confidence, to be established for both domestic and foreign investment to move forward.

From a business standpoint, what do you currently like about what Malaysia is doing and what don’t you like?

After a few years of political volatility, this new government … has been working hard and with strong determination to put together programmes that can take the country forward. But, of course, these programmes are just the beginning … [there needs to be execution]. And as programmes are executed, there are things that, on the base of experience, need to be adjusted and recalibrated. But one thing which is very clear is that the objectives of making the economy more competitive, more just, moving towards net zero and becoming more sustainable — all those things which lead to [stronger] growth are very important. But, of course, this is something that is going to require all hands to be on deck on the part of the administration so that it works seamlessly to deliver, because execution is critical.

And [there needs to be] the right policy framework, with less red tape, more liberalisation, more room for the private sector to play a role, for investment to come in. Public-private collaboration is key to the [success] of the programme. Frankly speaking, the people that we have talked to in government, including the minister in charge of this, are very determined, well-meaning and very able people. And that is an important thing.

On the global outlook: As things stands, especially with China’s economy slowing, do you expect a soft or hard landing for the global economy? The US Federal Reserve is talking about a soft landing. What is your view?

Let’s look at the facts. Undoubtedly, the global economy is slowing in 2023. It is slowing in part because it is a deliberate consequence of the policy actions that have been taken by the central banks in the major economies [to manage] high inflation. The good news is that inflation is coming down, [more clearly so] in the US. In the EU areas and the UK, there is still a farther way to go. Central banks have done the right thing in bringing interest rates up, and now interest rates will perhaps have to be there for perhaps longer than markets originally anticipated, and that is something that is going to take the steam off the global economy.

Now, are we going to have a hard landing or a soft landing? Unless something else happens in terms of a significant adverse shock to the global economy, in the base case, we are in for some further deceleration of growth, especially in the first half of 2024 in major economies, as a result of these policies. But, we would also see inflation coming down and, at some point, interest rates will also start coming down. So, that will also rebalance things and then, perhaps, likely in the second half of 2024 and beyond, you can have a better economic situation.

But, the global economy is likely to get softer before it gets better. However, I see this happening in a way that is not traumatic; so, I don’t see a hard landing. You may have some adjustment in the financial markets perhaps, in markets where valuations may remain a little bit rich; but, again, those adjustments in equity markets are not terribly [concerning]. What is most important for financial stability is that, for example, the global banking system is well capitalised to cope with this environment of high interest rates [that] will put pressure or add to the burdens of many of the debtors, and of slower growth, which puts pressure on the revenues of many of the debtors. But I think the global banking system is solid and able to withstand this.

And China?

Yes, the economic recovery in China — and remember, there is still a recovery — is not as intense as we all had originally expected. While we all thought that the second half of the year was going to be stronger, it turns out that it is much weaker than expected. But, all things considered, China is likely to grow — and this is my view as well as our in-house view — that China is going to grow by more than 5% this year, closer to 5.4%. Of course, this is going to be helped by some policy stimulus that the authorities are providing. And we see that China next year will continue growing, at around 5%.

In spite of all the talk about China and the concern about the commercial real estate sector, we should not forget that the commercial real estate [there] is part of the old economy, which is driving its own things; and then there is the new economy, which is very vibrant. In July, I spent a week there, in Shanghai and Beijing, and that new economy in China is very vibrant, and that is a compensating force. So, that gives me hope that in the medium term, the newer economy is going to become bigger compared to the older economy, and therefore that the economic prospects in China over the medium term will remain bright. Not very strong growth as we have seen in the past, 10%, but decent growth rates like 4.5% or 5% , which will still be relatively high for global standards. And given the scale of China, it will be a good contributor to global economic growth.

What do you see as the brightest growth spots within Asia? Of course, China makes up a big chunk of it.

I think that there is something very important happening in Asia. Asia has been a major contributor to global growth in the past, mainly because of China, and Asia is still leading global growth. If you’ve seen the consensus forecasts by the IMF, the World Bank, you’ll still see that emerging Asia, in particular, is leading global growth this year and next.

It used to be a China play. Now, what we’re seeing is that it’s not just one engine, but several engines of growth in Asia. You have China, of course, and then you have Asean, which is a very important economic region where Malaysia is located, and I think that is a great source of opportunity also for Malaysia. And then, you have India and South Asia, but particularly India, which is the largest economy there. So, you have several engines of growth. Of course, there are interlinkages, particularly between Asean and China, but that gives more stability to Asian growth. And we can see tremendous opportunities in Asia.

We can see tremendous opportunities in our [StanChart’s] markets. We have been realising very important business opportunities from the diversification of global supply chains, which has taken place as a result of the incentives for companies to work with the China-plus-one, China-plus-two strategy, of which a number of countries in the region have been beneficiaries here in Asean.

We have been identifying significant opportunities around sustainability ... and that’s an area where we want to contribute because we think it is the right thing to do, and also it’s a very good business opportunity for us. We have the plans to move our markets and our clients towards net zero, and we have the technical resources to put at their disposal. So, we see tremendous opportunities there, and we also see opportunities from the technology and digitalisation of many of the economies, where, again, we can be a source of dynamism and support of many companies, particularly in the new economy, as we are doing in the big countries in Asia, including Malaysia.

Do you expect the incidence of bank mergers in emerging markets to pick up over the next few years?

Consolidation is an unavoidable phenomenon worldwide. We’ve seen it in Europe, the UK, the US and in other countries. Sometimes, consolidations accelerate when banking systems get into problems. In other times, it’s just the force of competition, where the market is not big enough for some of the banks to thrive, and then, over time, there is a process of consolidation. So, I would say there will be a process of consolidation over the next few years in the world. Everybody has a focus on Europe. We saw one, for example, UBS absorbing Credit Suisse. Europe needs a big-time consolidation within banking systems and cross borders.

And within Asia?

Within Asia, you have some moves that have taken place, like when Citi sold its retail banking operation, then you had some local banks, including some Singaporean bank coming in, like in Malaysia, to buy those assets. So, that also leads to some sort of partial consolidation.

But one thing that is interesting, especially for global banks like us, which have reached an adequate [size] dimension, is that, today, if we want to gain market share, we don’t necessarily need to buy other banks. We can do other things. You can gain market share, for example, by using digital avenues. We’ve done it in Indonesia, Hong Kong and Singapore, through the creation of digital banks. If you want to gain market share in mass retail market, you can do it through digital partnerships. We’re exploring a number of those things here in Malaysia. We have launched these types of partnerships in Indonesia, in Kenya, in Ghana. Or, you can also [gain market share] organically through your own banking channels. We’re talking about innovative ways of gaining market share.

Speaking of digital, what’s your view of the use of artificial intelligence (AI) by banks? We’re already seeing robo wealth advisory. Is it something for banks to embrace wholeheartedly or to exercise some caution on?

You have to make use of advanced analytics, including AI. For example, our Global Business Services Centre in Kuala Lumpur has been developing products and solutions, which also use AI, for the whole group. So, it’s happening here, out of Malaysia, providing services for the group. We have been working on advanced analytics, machine learning for a number of years and this is something that we should continue using. This is very important in order to play defence and to play offence.

But you need to combine this with the human factor. And we know AI as machine learning is something that is filtered through judgment, that the data you bring in basically shapes the outcomes that you have. So, you need to be very mindful and very judgmental of how to use AI; you have to make a very judicious use of those tools, but you need the tools. That’s a must. But you need to be aware of the risks and you need to control it, because the more you rely on digital, advanced analytics and so on, you also have more risks associated with it … You need to make sure that all those risks are adequately taken care of so that you can achieve the goals you’ve laid out.

Will that also mean less need for human capital and branches for banks, going forward?

The way we see advanced analytics and technology is, basically, making our employees more productive and making our clients happy. Here [in Malaysia], we are having 70% digital usage, we’ll go to 98% and the goal is 100%. So, that’s very important. Customers have become very tech-savvy. Everywhere in the world, the number of branches has come down internationally. Of course, we’ll keep branches, but the concept of branching now is being redefined in a way where you have more advisory, you discuss more things like wealth products and so on. So, it’s not just about ‘do I close or not’; you have to think of branches as part of your strategic direction in terms of how to be efficient but also in terms of how to best serve customers in the new world in which we live, where digital is very important and people like digital.

Are there plans for StanChart to do further layoffs in Asia? There was one in June in certain markets.

No, categorically, no. I mean, these layoffs … some media had played up those things. We have a very dynamic organisation where people come and people go. And we tend to adjust things on a BAU (business as usual) basis in terms of the needs that we have in different markets. There is no plan to [axe] people or anything like that. What we want is to make sure that people are more productive. We … continue to hire, retain and develop talent because we need a future-ready workforce. There is no big plan to lay off people or to go to robots. We need people, and technology with a human touch is critical.

On the topic of sustainability, is StanChart continuing to lend to controversial sectors such as coal, aviation and oil and gas (O&G)? It’s a bit of a conundrum, right? Because on the one hand, you have to phase out lending to these sectors, but on the other hand, companies are complaining they’re not getting enough funding and they’re going to alternative sources such as private equity, in Malaysia, at least. And the transition to renewable energy (RE) is moving quite slowly; we’re not quite there yet. So, how do you fit all that into your sustainability plan?

We have looked at all of these very carefully, because we want to support the fight against climate change, in terms of mitigation and also in terms of adaptation. In terms of mitigation, we were one of the first global banks to come up with a published plan to go towards net zero, just before COP26 in Glasgow a couple of years ago. I submitted that plan to our 2022 AGM and it was endorsed by an overwhelming majority of shareholders, and that is a plan that provides a just transition to net zero.

We are not banking in advanced economies alone; we are mainly banking in emerging markets and developing economies, which have important social and developmental objectives. So, we need to make sure that the movement towards net zero happens in a way which doesn’t kill the growth of these economies because, otherwise, people will rebel, the politics will not be there, and the transition will end, and the world would be in deep trouble. So, we have managed to find a trajectory where we are consistent with the International Energy Agency’s pathway towards net zero, but which is executed in a way where we can continue supporting the growth in our markets and help them transition towards net zero.

Now, in countries like Malaysia or Indonesia or others, you have governments which have taken a very strong stance in developing framework towards net zero, and that is very important. And we have also articulated our net zero proposition around three basic pillars. The first one is reducing emissions. We have stopped financing coal already, a few years ago. We have not been providing financing for coal and we will not be providing financing for coal, except for the decommissioning of coal-fired power plants.

So, that’s a hard stop, then?

That’s a hard stop. But we provide financing to the O&G sector, because we think gas as a transition fuel is important. If a company moves from coal to gas, we’re happy to finance that. And then, we’ll finance greener sources of energy. But, in many cases, you cannot jump from brown to green. You have to go from brown to semi brown, to semi green, to green. So, we are focusing on that. And we have established targets to cut absolute level of emissions, for example, in the O&G sector.

A number of external stakeholders and some NGOs have asked us to stop financing the O&G sector. We cannot do that because the world would stop. We need to provide financing for the O&G sector for gas because that’s important for the transition; it’s a transition fuel; but also because the O&G sector needs to invest in renewables, which then helps them move down the carbon curve. So, that’s important.

We have established emission reduction targets for all sectors, and we will bring it down. We’ll be net zero in terms of our own operations, Scope 1 and Scope 2, by 2025, and then we will be net zero in terms of our financing operations by 2050.

Second, this is not going to happen just like that; it requires money. We have committed over US$300 billion by 2030 to finance this transition in terms of sustainable finance. We have already in the last couple of years mobilised more than US$50 billion, so we are putting our money where our mouth is.

And the third pillar is that we have what we call our acceleration teams, where we are providing a suite of specific products and solutions to our customers in the professional and tech support, which is needed to help them move forward. There are a number of companies which may not need that … Petronas already knows what to do, and is doing it. But there are other customers and clients which may not be as high up, which require support. So, we’ll provide not only money, but also technical and professional support for them to move forward. We feel this is important. We feel there is a commercial opportunity there and we are pursuing this with tremendous determination.

What about the aviation sector?

I’ll give you an example. We have sold, just last week, our aviation leasing business because of a number of considerations and also because it is in line with our sustainability commitment. We have been selling, over the last few years, our shipping businesses — we have exited our ship leasing business, and that, again, is in line with our sustainability commitment.

Sustainability is now something that is applied to every single decision at the bank. We need to assess sustainability. We had asked all our corporate clients in the high-carbon sectors for transitions plans to be delivered by the end of last year. We have been scrutinising these transition plans in Malaysia and other economies, and working with our clients to make sure that these transition plans get them and us to where we want to go.