Gulf Liquidity: Shifting Petrodollar Assets

The UAE central bank reserves fell to just under $35 billion at the end of November (the most recent available data.)  That represents a decline of about $6 billion in the month of November and an average decline of $5 billion a month since July.  The reduction in UAE central bank reserves came significantly before the central bank agreed to buy $10 billion of bonds issued by Dubai last week and even before it stepped up dollar/dirham swaps in December in its effort to provide new liquidity to the banks.

China’s resource buys

China development bank must be busy…. Over the last few weeks deals worth over $50 billion have been confirmed with the oil companies of Russia, brazil and the Australian mining company Rio Tinto, all of which have found themselves with financing issues in light of the collapse in commodity prices and credit crunch. While $50 billion is a relatively small in terms of China’s foreign exchange liquidity, this is a significant investment on China’s part in the resource sector, and shows that it is trying to get higher returns on its capital – while coming to the rescue of those who cannot tap the still relatively frozen international capital markets. And given some of the dire predictions for energy sector investment (including warnings from the IEA) might avoid a severe drop off in investment, allowing some of these countries and China to get more bang for the buck as global deflationary trends lower costs.  Most significantly, it increases the share of oil supplies that are pre-contracted, perhaps a desire from both China and its suppliers to have a somewhat more predictable price environment for at least some of its supplies.

Will China Be the First To Recover?

On Friday Bloomberg ran a rather up-beat piece by Kevin Hamlin suggesting that China might be the first major economy to recover from the global economic slump given that its fiscal stimulus and credit boost would support domestic demand.  This is the latest in a series of more optimistic pieces that have been appearing in recent weeks on Chinese economic outlook prompted in part by recent data (PMIs, credit and money growth) which suggests that the pace of economic deterioration in China is now slowing.

Russia and Kazakhstan: A Tale of Two Devaluations

In recent weeks, both Russia and Kazakhstan allowed major depreciation of their currencies to adjust to their new terms of trade and then attempted to repeg their currencies. These new pegs despite reflecting a 35% (Russia) and 20%+ (Kazakhstan) reflectively might not be the end of of the story as outflows and pressure on their reserves may continue to mount, causing pressure on the new ‘equilibria’ that they hope will be lasting. Russia’s depreciation has been both more gradual – including 20 or 1% moves from November to mid January before a broad widening of the trading band which they have subsequently tried to maintain by hoisting interest rates. – and more extensive (35%) whereas Kazakhstan’s has so far moved less than 20%, most of it over Feb 4. Both have faced a reversal of their terms of trade, pressure on the current account (Kazakhstan’s was in deficit again in Q4 and Russia’s shrank to a small surplus) and with oil dominating their exports even their respective 30%+ and 18% devaluations may not spell the end to the pressure given that the commodities which dominate their exports remain cheap.

Parsing the Chinese Hard Landing

China released a raft of economic data today – all of which – as expected, show that output stalled on a quarterly basis and actually contracted in the fourth quarter of 2008. This is consistent with the outlook we depicted in the RGE Global outlook – available this week to premium subscribers – in which we argued that the that global demand for Chinese goods will remain weak through 2009, that government investment will only partly offset the decline in corporate capital expenditure and that property investment and consumption will weaken – leading to GDP growth of 5% or less in 2009.

Saudi 2009 Budget: Deficit -Bound

The Saudi Arabian government released its 2009 budget – one of the first glimpses of how key oil exporters may respond to the changed oil price outlook for 2009. At current (sub $40/b) oil, most will run fiscal deficits and some will run large ones. Saudi Arabia’s budget takes such concerns in stride, projecting a budget deficit for the first time since 2004. And despite comments in the press, its not necessarily expansionary – they plan to spend more than they planned to in 2008 but less than they actually did.  While Saudi Arabia (and most of its GCC neighbors) maintained conservative budgeted oil price estimates, expenditures have been rising significantly since 2006. Yet, despite increasing spending, Saudi Arabia’s revenues (which are primarily from hydrocarbons) were almost double that of expenditures in 2008. Yet past history warns that spending catches up and the big question is whether the oil price slump will cause a spending slump as was the case in the 90s.

Eight Asian Predictions for the Year of the Ox

2008 has been a tumultuous year in Asia marked by the deterioration of exports and a collapse in many regional asset markets as the global recession worsened and leveraged investors withdrew. Hopes that Asia would “decouple” were, as we feared at the start of 2008, overly optimistic, as Asia’s domestic demand remains strongly correlated with exports and global liquidity. Growth and industrial production are now slowing sharply in many Asian economies and we fear the outlook will worsen in the first half of 2009.

More on the Chinese fiscal stimulus

The Chinese fiscal stimulus has provoked much debate since being announced last Sunday as analysts try to assess its impact. Will it succeed in cushioning China’s economic performance, will it contribute to more domestic imbalances? a first area of debate fixates around how much of the investment to be approved is “new” that is not included in the current 5 year plan and budgeted as such. Around 1/3-1/2 of the projects seem to be new, previously unannounced spending while much of it is a compilation of initiatives already announced or items that were already scheduled in the current five year plan.

Can OPEC Stem the Downward trend?

UPDATE: As anticipated, OPEC cut production in its October 24 Meeting. OPEC agreed to reduce production from its output ceiling by 1.5 million barrels a day from where it is currently set at 28.8 barrels a day. OPEC has been producing well over this quota for much of the summer and fall – so the reduction could be even larger. However as suggested in the piece below, written Oct 23, the prospect of even weaker demand as the economic climate worsens and the effects of wealth losses sink in, continued to push oil, other commodities and global equities downward. As of first thing this morning, Equities had one of their worst days with many markets halting trading – including the S&P futures.  OPEC may be unable to stop the downward trend in prices given that global recession is reducing demand and oil is one of the many assets that few people want to hold.  At a minimum no increase in demand for oil as a financial asset is likely until financial markets stabilize. Furthermore, OPEC will want to be careful not to further erode demand. More cuts seem likely at OPEC’s December meeting and expect to hear more concerns about the financial factors not ‘fundamentals’ affecting the oil price.