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21st August | Dubai
Indosuez Wealth Management, the global wealth management business line of Crédit Agricole Group, present in the UAE in Dubai and in Abu Dhabi through the representative offices of CA Indosuez (Switzerland) SA, published its Macro Comment report highlighting how the current account balances for the MENA counties, especially the Gulf are still suffering from the 2014-2015 oil price collapse.
Saudi Arabia’s current account went from a surplus to a deficit of 8.3% in 2015. More recently the country avoided to run a twin deficit in Q1 2017 as the Saudi Ministry of Finance disclosed a budget deficit of 4% of GDP annualised, and the rebound in the oil price helped to get the current account back in surplus. Exports gained and imports declined due to weak domestic demand, resulting in a USD 6 billion surplus mainly due to oil-related exports receipts. Despite this, the capital account displayed large outflows reflecting possibly reallocation of sovereign wealth. Reserves continued to decline over the January-May 2017 period and stand now at USD 499 billion, i.e. a decrease of USD 247 billion since its August 2014-high.
Bahrain’s surplus shrunk to 3.4% of its GDP in 2014 and Kuwait’s collapsed to 7.5% in 2015 (vs 45.5% in 2012). The former suffered the same fate as Oman as its debt was cut last year to below investment-grade by all three of the major credit ratings agencies. Jordan appears as an exception as its deficit diminished to 8.9% in 2015 from 15.2% in 2012.
Similarly, Egypt’s current account deficit recorded its lowest deficit since 2014 in Q1 2017 due to higher exports, lower non-oil imports, and improving revenues coming from tourism and workers’ remittances. This is partly due to the devaluation of the Egyptian pound last November, and translated into foreign exchanges reserves amounting to USD 31 billion in June, i.e. twice their level of July 2016. Oman turned to a current account deficit of 15.5% in 2015 from a surplus of 10.2% in 2012. This eroded the country’s external reserves to the point that Oman’s debt rating was to “junk”.
Dr. Paul Wetterwald, Chief Economist, Indosuez Wealth Management business line, said: “Saudi Arabia is able to rely on its reserves that remain considerable and amount to more than two years’ worth of imports. This should allow the authorities to withstand any pressure on the peg, but should not pause any diversification efforts and various reforms that the country has been active with under the new crown prince, HH Mohammed bin Salman. This is because the country’s currency is historically pegged to the dollar and cannot afford to persistently run current account deficits. Saudi does not have the benefit of “international seigniorage” enjoyed by the US, whose current account deficit is 2.5% of its GDP.”
Dr. Wetterwald continued: “Additionally, considerable uncertainties continue to characterise the current US administration’s real impact on the global economy. The key issues for MENA economies are the strengthening of the US dollar, the possible rarefaction of the currency outside the United States following the repatriation of war chests by US businesses and the rise in interest rates. These developments would negatively impact the debt refinancing of some countries lacking natural access to the dollar through regular export flows.”
COOPERATION IS KEY
The considerable amount of US dollar reserves held by MENA countries provides them with a reason to work together and mutually support each other. Indosuez expects this to contribute towards a rethinking around the exchange rate arrangements of MENA countries, which are far from a floating rate regime. However, Indosuez notes that the time does not seem to be ripe for these countries to consider a currency union.
MENA reserves total to USD 875 billion, of which slightly less than 500 billion are held by Saudi Arabia. Despite this seeming a huge size, it is dwarfed by the holdings of various central banks in mature economies. As of June 30, 2017 the US Federal Reserve balance sheet reached USD 4,467 billion, of which USD 2,465 billion was in US Treasuries and USD 1,770 billion in Mortgage Backed Securities. At the same date, the European Central Bank balance sheet’s size was EUR 4,210 billion (USD 4,800 billion) and the Swiss National Bank balance sheet stood at CHF 779.7 billion (approximately USD 780 billion) at the end of May. As for the Bank of England, its balance sheet amounted to GBP 423 billion (USD 531 billion) as of March 31, 2017. A very large proportion of these figures are made of marketable securities, which means that the disposal of a part of these securities by these central banks would potentially impact the financial markets more than a potential sale by MENA monetary authorities.
Dr. Wetterwald added: “A country’s current account balance gives us a hint about the resilience of its currency in times of crisis. The stronger is the balance, the less need there is to draw into reserves to defend the currency. The MENA countries current account balances have globally deteriorated in tandem with the oil price’s decline. Given their size, the sale of MENA reserves to maintain the peg should not by itself provoke a crash; despite likely having a negative impact on financial markets. For this to happen we would need to see other investors selling at the same time, either due to monetary policies of their own (for example mature economies’ central banks) or because of momentum-driven portfolio managements’ strategies from large private investors.”