The Great Arabian Bubble
December 05, 2006
By Serhan Cevik | from Amsterdam
Petrodollar liquidity has become an overwhelming force in the global economy. The global economy and financial markets are full of ‘mysterious’ interconnected channels that may help to minimise the consequences of one type of shock but also build up imbalances in other areas. Take, for example, the global commodity boom. Oil-rich countries in the Middle East have enjoyed a surge in income growth from an average of 3.7% a year in the 1990s to 6.5% over the past five years, as export earnings increased from US$251 billion in 2002 to US$593 billion last year and approximately US$780 billion this year. With soaring oil prices, the region’s cumulative current account surplus widened from 5.4% of GDP in 2002 to 22.7% in 2005 and 25.5% this year. Even though oil exporters’ current account surplus — increasing from just 0.1% of global GDP in 1999 to 1.3% this year — is effectively a tax on the rest of the world, the global economy has kept surging ahead. In our view, the recycling of petrodollars that has fuelled global liquidity is a crucial factor curtailing the adverse effects of the commodity shock.
Even after a deep correction, there is still no sign of recovery in Middle Eastern markets. The abundance of petrodollar liquidity led to the emergence of a new equity culture in the Middle East, where stock markets had remained by and large irrelevant for decades. Unfortunately, lacking historical benchmarks and a proper regulatory structure, the liquidity-driven boom in asset markets resulted in a speculative frenzy that eventually collapsed under its own weight (see Petro-Bubbles, May 15, 2006). After posting gains as high as 900% in Saudi Arabia and 1,475% in Dubai between 2001 and the first quarter of 2006, price-earnings ratios reached levels that could no longer be justified on ‘fundamental improvements’ in the region. Indeed, despite the surge in energy prices, Middle Eastern equity markets have experienced a sustained correction, reaching 65% in the case of Dubai and 50% in Saudi Arabia. Although the authorities have intervened through state investment funds, shares prices remain depressed, with no sign of recovery in investor confidence. After all, ex-oil economic fundamentals and institutional factors are no less important than liquidity conditions, especially as the region faces the risk of a slowdown in the global economy and the dollar’s depreciation. Commodity-dependent economies are vulnerable to a slowdown in the global economy. Export revenues of oil-producing countries in the Middle East snowballed to US$1.5 trillion in the past four years. This is an incredible accumulation of wealth, but still susceptible to the state of the global economy. For example, correlation coefficients for output growth in Saudi Arabia and the United Arab Emirates vis-à-vis the US economy increased from -0.69 and -0.08, respectively, in the 1990s to 0.74 and 0.85 over the last five years. In other words, a sharp slowdown in the global economy would depress oil prices and thereby the region’s economic performance (see When Atlas Sneezes, October 25, 2006). Domestic financial markets may not be pricing in such a scenario yet, but they certainly reflect the limits of liquidity-driven bubbles. Of course, higher volatility in underdeveloped markets of the Middle East has encouraged investors to recycle petrodollar liquidity into international asset markets. Oil-exporting countries have accumulated foreign assets at an accelerating rate. Net foreign assets of oil-exporting countries increased by 1.5% of global GDP a year in the first half of 2000s and by 2.5% in 2005. Coupled with higher oil prices, the collapse of stock markets in the Middle East has accelerated the accumulation of net foreign assets to 3.8% of global GDP this year. This massive liquidity injection is probably even more important than China’s reserve accumulation in explaining the so-called ‘conundrum’ of low long-term interest rates. However, unlike the 1970s, oil-exporting countries are not just depositing their windfall revenues with international banks. Instead, they have funnelled an increasing amount of oil earnings into domestic capital expenditures and, more importantly, adopted a higher propensity to use new investment vehicles and to invest in new markets around the world. Of course, these interconnected channels of influence make petrodollar liquidity an overwhelming force that will no doubt shape the adjustment of global imbalances.
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October Exports Decelerate
December 05, 2006
By Chetan Ahya and Deyi Tan | Mumbai, Singapore
Trade momentum loses sheen: Exports recorded a decline of 3.4% YoY in October (versus +11.4% YoY in September). This is the first time since March 2002 that exports have contracted. Imports also showed a similar trend, declining 1.4% in October (versus +7.0% in September). Even on a sequential basis, both exports (-9.6% MoM) and imports (-9.9% MoM) continued to register negative growth in October. Consequently, the trade balance stood at RM9.4 billion in October (versus RM10.2 billion in September). Global factors explain most of the downside in export growth: Broken down, most segments recorded a deceleration in export growth in October. This is in tandem with the slowdown in export growth seen in other Asian economies recently. The decline in number of working days because of festive season holidays only accentuated this trend. Specifically, exports of electrical and electronic products dipped sharply to -5.9% YoY, subtracting 2.9%-pt from the headline number (versuss 9.7% YoY and +4.9%-pt in September). In addition, exports of crude petroleum and refined petroleum products (-3.2% YoY and -11.2% YoY in October) also decelerated compared to the previous month. Palm oil exports, however, accelerated to 21.0% YoY in October (versus 13.9% YoY in September). In terms of market destinations, the trend remained lackluster. Exports to all the major destinations decelerated in October as compared to the previous month. Exports to the US and EU decelerated to -6.6% YoY and 11.7% YoY in October (versus 3.8% and 30.3% in September). Imports growth contracted in October: By end-use classification, the import momentum weakened across the board. Imports of capital and intermediate goods recorded a decline of 3.8% YoY and 0.8% YoY in October (versus +8.0% YoY and 9.5% YoY in September), while consumer goods imports decelerated to 3.8% YoY in October (versus 14.1% YoY last month).
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