Kuwait has lagged behind as political deadlock delayed an infrastructure push. Its power deficits have been amplified by the fact that no new capacity has been added since 1990, and infrastructure is both old and overstretched. In June it came within a hairbreadth of outstripping the national supply threshold. Although the government managed to bring in emergency turbines and ration supply, these problems will recur before new capacity comes online. As noted in our last Outlook, RGE is pessimistic about the timelines the Kuwaiti government has set out for implementing the infrastructure plan approved early in 2010. While the plan is a step forward, the network of overlapping laws (both the public-private partnership law and power law might apply to partnerships in the power sector) and vested interests could cause delays, since there is a need both to build new plants and to renew the grid. Foreign expertise, if not foreign funds, will be in high demand, including from the Asian and European players who have been active in other GCC countries.
Although lending by foreign banks to the region is much slower than in the boom years, the increase in loans in Q1 is a sign of stabilization. BIS data show that net lending from European banks to the MENA region crept up in Q1 2010, led by loans to Saudi Arabia and Qatar, which received US$8 billion and US$3 billion, respectively. We see it as no coincidence that these countries also account for the most significant lending growth in the GCC. The availability of foreign funds, along with continued government fiscal expansion, seems to have helped ease domestic credit conditions, support domestic liquidity and fuel a revival in equity markets early in the year. We expect that the pace of inflows cooled in Q2 2010 given the generalized correction in emerging and frontier markets and selloff in local markets, but on aggregate credit should continue to flow to those countries that have the strongest domestic demand, either private or government financed.
Over the last week two frontier markets-Ukraine and Kazakhstan- retracted their ambitions to venture into international debt markets with Eurobond issuances. In both cases, these are countries that are not in need of immediate cash, but they are emblematic of a recent trend in which frontier markets are still having trouble accessing global markets at a price they like.
Today the conference board announced a downward revision in its almost brand new leading indicator for China, suggesting that Chinese growth trajectory will be slower than expected. Markets characteristically did not react well, with the Shanghai stock exchange falling over 4% today, extending its losses to 26% from the peak. But liquidity rather than just the news about the revision seems more likely to be the cause.
The most recent (April 2010) reading of the conference board leading indicator, which launched earlier this quarter shows an increase of only 0.3% rather than the 1.7% previously indicated. The downward revision, wholly due to a miscalculation in one of the four main indicators used (the construction sector), brings the CB survey more in line with the longer standing OECD leading indicator for China, which has been signaling a deceleration of growth of late. In fact, the strength of the indicator was puzzling when the first version was released in mid June, since it seemed at odds with a range of other recent data.
We hope all our readers are enjoying the World Cup! Given the international diversity of our analysts and strategists, the event has certainly been the preeminent topic of water-cooler conversation this week in our New York and London offices. While we are recognizing the limits of our abilities and refraining from forecasting a winner, we noted in a recent Critical Issue, “Can Economists Predict the World Cup Winner?” that many other research firms are, in fact, making such calls.
So China has a trade deficit…and a big one at that.
The first monthly deficit in 6 years is a gap of US$7.24 billion! Despite hints from Chinese officials, this was much larger than consensus expected (Bloomberg surveys pointed to US$500 million), and we actually expected a small surplus, proving that as usual, Chinese government statements in the press about forthcoming data releases should be taken at face value.
The rhetoric on exchange rates is heating up again, even more so than we indicated in yesterday’s newsletter. Following Premier Wen’s statement that the Renminbi is not undervalued and that U.S. pressure for dollar “devaluation” felt like trade protection from China’s perspective, Congressional leaders have been seething and calling for action. First there was the signed letter urging that China be labeled a currency manipulator at the next report on U.S. trade partners which is due April 15 from the Treasury department. Then a group of senators launched some new legislation that grafts together past legislation and focuses on whether or not currencies are misaligned, and plans a schedule of remedies if they are deemed so. All in all, politicians in both countries are trying to gain domestic support by attacking each other’s policies. This, as the economist argued last week, could actually defer the adjustment both sides know is necessary.
Fox Business — China in a Real-Estate-Fueled Bubble? Roubini Global Economics Senior Analyst Rachel Ziemba weighs in on China’s economy. (Click for Video 5:20) All rights reserved, Roubini Global Economics, LLC. Opinions expressed on RGE EconoMonitors are those of individual analysts and may or may not express RGE’s own consensus view. RGE is not […]
Today’s report that China’s holdings of Treasurys slipped to US$889 billion in January 2010 surely added grist to the fire surrounding the heightened tensions in the pivotal bilateral relationship. These tensions are coming to a head in U.S. and Chinese legislative sessions and imply that coming weeks and months may be filled with more posturing as we wend our way to a series of bilateral and multilateral meetings. Policy makers from both countries are starting to draw lines in the sand and it remains to be seen how far they will go to defend these lines. This posturing, if it is posturing, could be counterproductive in the long-term. Both sides are sorting out how strong their hands are…More on this to come from us later this week.
A credit-fueled investment boom successfully boosted China’s growth to 8.7% in 2009, but cheap money drove up asset prices as well, especially in property markets. As China’s output gap closes, loose money is now set to become inflationary, particularly if China’s potential growth rate has come down slightly, as RGE thinks it has. The People’s Bank of China (PBoC) has twice hiked banks’ required reserve ratios (RRR) in 2010, following a return to net liquidity reductions through open-market operations in October 2009, but RGE suspects that the tightening moves have had little effect. As discussed in a recent RGE analysis, “China: No Exit,” which is available exclusively for RGE clients, China’s monetary policy has shifted toward a neutral stance in recent months, but it will have to tighten further if inflation and the property bubble are to be contained.