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Weekly Economic Review - UAE, India & Global Macro

|Includes: Market Vectors Indian Rupee/USD ETN (INR)

Weekly Economic Review

Week ending November 22, 2014


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As per data from the UAE Central Bank in September, deposits in the UAE Banking system fell by AED 6.50 billion and loans surged higher by AED 33.50 billion. The loans to deposits (L/D) ratio for the system as a whole has now surged higher to 97.63% after starting the year in January at 91.87%. The rebound in economic sentiment over the last 2 years is now raising the demand for loans as companies invest, the large real-estate sector re-ignites and mega project launches make a strong come back. The L/D ratio is running into danger zone and if oil prices remain low for a prolonged period of time, we could see slower GCC government spending, which in turn could result in a lower rate of increase in deposit growth. As we head towards the 100% mark in the L/D ratio, it brings back memories of 2007-08 when it peaked at 110%.

In the Sukuk markets, FlyDubai the no-frills flyer owned by Dubai Government, raised $500 million in a 5-year issuance which was priced at 200 bps over mid-swaps, at a yield of 3.776%. This issuance also was massively oversubscribed with orders topping $3 billion, over 6 times the issue size!! The oversubscription for this issuance shows that middle-east Islamic investors are still sitting on vast pools of investible funds that are craving for higher yields.

Another start up IPO opened up this week as Dubai Parks & Resorts IPO opened up for subscription, offering about 40% of its equity at a price of Dh. 1 plus an administration fee of Dhs. 0.01. The IPO values the company at about Dhs. 6.3 billion ($1.715 billion) and the first phase of the theme park will be operational in the third quarter of 2016. The three theme parks that will be developed by Dubai Parks and Resorts will be Motiongate, the Legoland theme park & Bollywood Parks. This IPO will be open for subscription up to November 30 and is expected to be successful given the buoyancy in markets currently. The two other start-up IPO's in 2014 were massively oversubscribed with Marka trading at a 30% premium to its issue price and Amanat is expected to start trading next week.

The Indian Rupee has slowly weakened over the last few weeks and hit lows not seen in nearly 9 months. The trigger on Wednesday was provided by oil companies buying US Dollars to pay for crude oil imports. On Thursday the momentum continued with the USD/INR touching a high of 62.2200 which has not been traded since Feb this year. There were unconfirmed rumors of RBI intervening, selling US Dollar to cool the fall in the Indian Rupee and the momentum turned rapidly to send the Indian Rupee back below the key level of 62.00. This basically implies that the RBI will not let the Indian Rupee appreciate at a time when most other emerging market and even some of the G-7 currencies are weakening, but it will step in to moderate the pace of depreciation as and when it happens.

Exports had their first decline in Fiscal Year 2014-15 in October after a few months of steady growth, falling 5.04% to $26.09 billion. A decline of 9.18% & 8.33% in Engineering goods & pharmaceutical exports were the large contributors to declining exports in October. Imports on the other hand increased by 3.62% to $39.45 billion and the good part of this data was the increase in non-oil imports of 18.9%, which is quite typical in the early stages of a growth cycle. The not so good part of the imports number was the surge in gold imports which increased nearly 4 times to $4.17 billion from $1.09 billion in October 2013. The trade deficit for October at $13.35 billion remains in percentage terms the largest and the second highest in absolute terms globally, barring the US, the structural imbalance in trade will take several years to correct. With Japan and most of Eurozone facing deflationary conditions and recessionary conditions, only the US economy seems to be in a position to suck in incremental exports from India.

Indian equities continued trading higher and higher into record territory amid positive global factors and improving sentiment locally. Foreign Institutional Investors (FII's) continued to pour investments into Indian equities with flows of $205.27 this week. As we run closer to the RBI monetary policy meeting in early December the calls for a cut in rates is gaining ground with Finance Minister Arun Jaitley stating that since inflation has moderated, if RBI cuts rates it will give a good fillip to the Indian economy. The debt markets in India continued to attract inflows with $715.48 million of inflows this week with year to date inflows in debt markets topping inflows into equities at just over $13 billion.

In US, economic data was mixed with existing home sales topping expectations at a 5.26 million annualized pace. Whereas Housing starts were slightly lower than expectations at an annualized pace of 1.009 million. Industrial production for October dipped by 0.1% over September due to a decline in mining and utilities. Consumer Prices (NYSEARCA:CPI) for October was flat which was slightly higher than market consensus for a 0.1% dip. The volatile weekly jobless claims number edged back higher to 291k. The keenly awaited minutes of the FOMC meeting indicated that some Fed members are worried about signs that long-term inflation expectations cooling off and if growth falters at a time like this it will be even more worrisome. The fall in commodity prices globally over the last few months has created worries of asset price deflation, when two of the big three economies globally, Eurozone & Japan are already suffering from fears of deflation. The US has another issue to deal with the strengthening US Dollar which imports deflation in the form of lower import prices. The biggest advantage to the US economy from falling commodity prices and import prices is this could spur consumer spending during the crucial holiday spending season which is just around the corner. Lower gasoline prices could provide a strong boost to consumer spending. As per an estimate by Deutsche Bank economist, LaVorgna every penny lower on gasoline prices provides a $1 billion boost to consumer spending and netting off the impact of higher food prices it will still have a positive effect on the economy.

The Euro again fell on verbal intervention from ECB President Mario Draghi. Speaking at the European Banking Congress he stated that the ECB "will do what we must to raise inflation and inflation expectations as fast as possible, as our price stability mandate requires of us." There seems to be a new urgency in the ECB to fight deflation and in his speech he mentioned that the "inflation situation in the euro area has also become increasing challenging." The importance to push up inflation and the urgency could be gauged from the repeated reference to the word "inflation" in his speech which was used over 40 times!! CPI in Euro zone for October is at 0.4% and way off the ECB mandate of 2%. Central Bankers have always been more worried about deflation than inflation and the experience during the great recession of 1930's & Japan's experience in battling deflation for nearly 20 years now is a worrying prospect. Since he assumed office in late 2011, ECB President Mario Draghi has been very effective in talking the Euro lower, which has two effects of aiding the large net exporting zone with a cheaper currency and currently in his efforts to fight deflation the lower currency helps increase import prices which will feed into inflation.

In a surprise move the Chinese Central Bank cut interest rates for the first time in over 2 years. The Peoples Bank of China (PBoC) cut the one year deposit rate by 25 bps to 2.75% and made a deeper cut of 40 bps in the lending rate by lowering it to 5.6%. The outlook for China has deteriorated right through this year, after cutting the growth outlook for 2014 in early Jan. The problems with the large shadow banking segment has squeezed liquidity available to the private sector. The large slowdown in real-estate prices has accelerated with 67 of the 70 cities in China reporting a drop in prices with an overall drop of 2.6% (y-on-y) in October. The market has got well into the mode of " bad news is good news." The cut in rates sparked an immediate rally across the board in equity markets which have typically rallied on weak economic data over the last few years, in the hope that any bit of weak economic data will induce policy makers to loosen monetary policy even further.

Japan reported a second consecutive quarter of negative growth to plunge into yet another recession. The fall in Q3 GDP of 1.6% was way below consensus forecasts for a 2.1% rise. The yen touched a 7&1/2 low at 118.98 this week after the announcement of early elections. The 45% fall in the Japanese Yen has not yet, propelled the Japanese economy out of "secular stagnation." There is no ammunition left in monetary policy with rates at zero for nearly two decades, repeated use of fiscal measures has resulted in a debt to GDP ratio of over 140%, the latest bout of quantitative easing one of the 3 arrows of Abenomics also has not produced the desired results in an economy with severe demographic imbalance, where adult diapers outsell baby diapers.

Compiled & Researched by: CA Shailesh N. Mulki

Disclaimer: The views and information contained herein are the personal views of the author. These should not be taken to constitute advice or recommendation.