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Weekly Economic Review - UAE, India & Global Macro

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

Week ending July 4, 2015


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The crash in oil prices since the OPEC meeting in November has resulted in Crude Oil Benchmark Brent trading around or below $60 a barrel for about 7 months now. This is below the price that most regional GCC countries had used to project fiscal budget numbers. Kuwait has slipped from a projected budget surplus for fiscal year 2014-15 to a deficit of $7.6 billion. Kuwait is estimated to have assets of over $500 billion in its sovereign wealth fund and could tap into that. Finance Minister Anas al-Saleh in a interview this week mentioned that they could possible issue bonds to finance the deficit. In 2014 Saudi Arabia has forecasted a fiscal surplus of $54 billion. IMF in a report released last week forecast a fiscal deficit of $130 billion in 2015. Oil revenues account for about 90% of government revenues. Saudi again has large accumulated surpluses and it is estimated that they have drawn down by about $50 billion in the last few months. Qatar is expected to have its first budget deficit in 15 years due to massive infrastructure spending, but again it has large surpluses saved up from earlier years which will help. Oman is expected to post a deficit of $6.7 billion in 2015 which is about 8% of GDP. Bahrain is expected to post a deficit of about $4 billion which will be over 10% of its GDP.

UAE is expected to post a deficit of about 2.3% of GDP but again with Abu Dhabi's sovereign fund estimated to have assets of about $0.5- $1 trillion this will not cause stress in the short run. As per a senior Ministry of Finance official, the drafting of the corporate tax law and the value added tax (VAT) laws is likely to be completed in the third quarter of this year. In May the six GCC countries had agreed to keep working towards introduction of VAT around the region. Vat can be introduced by GCC countries in unison, else it will provide arbitrage opportunities due to strong trading ties within the region.

Equity markets across the region sold off massively on Sunday after the incident in Kuwait on Friday last week. Stocks in Dubai sold off by 2.19% on Sunday and eked out gains through the rest of the week, but still closed lower for the week.

As per data from RBI, India's external debt increased by $29.5 billion in fiscal year 2014-15 which is a 6.6% increase from March 2014. Commercial borrowings increased by $32.4 billion which offset repayments of bilateral, multilateral & IMF loans, paring down of short term debt of $7 billion was also positive. NRI deposits contributed $11 billion to the increase in foreign loans. The debt due in one year at 84.7 billion, when compared to the FX reserves on hand is at a comfortable level. During the fiscal year FX reserves outgrew the increase in foreign debt, increasing by $37.7 billion. Strong inflows especially from FII's have helped bolster FX reserve balances with inflows of $12.6 billion split equally in equity and debt markets in 2015 till date.

The rate cut by RBI this year is finally feeding through as banks started cutting deposit rates, which HDFC Bank, ICICI, Kotak Bank, United Bank of India bringing down deposits rates. Last week, we had witnessed banks cutting their base rates by around 15-25 bps. The cut in base rate have been about 25-35 bps against a cut of 75 bps in the RBI's Repo rate this year. RBI Governor has raised concerns about the effective transmission of RBI rate cuts in the economy. Banks rely on deposit to raise funds, the rates of which are not directly linked to the base rate. On the other hand a large portion of the bank's lending book is directly linked to the base rate. This anomaly results in slower transmission of RBI's rate cuts into the real economy.

Indian equities posted gains for the third consecutive week, amid positive factors like good monsoon rains, government measures to boost capital of PSU Banks, which annulled the negative news from Greece & China. Economic data was also upbeat as infrastructure output which comprises just under 40% of industrial output, growing 4.4% in May. This is also the fastest pace of growth recorded since October 2014's 6.3%. The Indian Rupee was also resilient and posted gains on the back of foreign inflows and exporter selling. Comments by RBI Governor that the economy is gathering pace and that the country is well positioned to combat any negatives for the developments in Eurozone.

As per data released by State Administration of Foreign Exchange, FX Reserves fell by $110 billion in Q1. China's Forex reserves have now fallen by $263 billion in the last 9 months after peaking at $3.993 trillion in June 2014. In Q1 the Chinese Currency was under pressure trading close to the upper end of its permitted 2% band when the People's Bank of China is rumored to have sold dollars to prevent it from breaching the 2% limit. This pressure of trading around the upper end of the band eased off in middle of March and it has been trading in a steady range since. China has also witnessed capital outflows as the economy posted its slowest growth rate in 25 years, the real estate sector has collapsed & the large shadow banking segment is under severe pressure. The crackdown on corruption has also incentivized Chinese nationals to move assets overseas away from the prying eyes of the regulators, which in turn is possible due to liberalization of exchange controls in recent years as Chinas seeks to internationalize its currency. This week China's Shanghai Composite Index fell by 12.07% and is now 28.88% lower than the high of 5176.79 traded on May 6, just about 2 months back. The extent of the liquidity driven rally in Chinese stocks over the last one year can be gauged from the fact that the one year return on the Shanghai Composite Index is still as high as 82.56%!!! The Greek Crisis has pushed developments in China into the background, which is quite different when it comes to size. Greece is less than 2% of GDP and about 76% of its total borrowings of $326 billion are held by the IMF, EU, ECB & the ECB member banks in the respective countries. In contrast China is the world's second largest economy and a big slowdown or financial stress in China will send ripples across the globe. While the Greek debt crisis has sent some shock waves across the world, a crisis in China will create far larger and sharper waves across the world.

US economic data was mixed this week. Case-Shiller Home Price increased 4.9% in April, slightly below the market expectations of a 5.4% increase. US Consumer Confidence as measured by the Conference Board's Index was buoyant at 101.4 well above the market's consensus at 97.3 and it is the second highest level after Jan 102.9 since 2007. ISM's Manufacturing Index was stronger at 53.5 which some of the sub-sectors like new orders and employment posting strong gains. Non-Farm Payroll data was slightly under par with jobs added in the economy for June coming in at 223k. There were sharp downward revisions for the previous two months totaling 60k jobs. The surprising part was that wage inflation as measured by average hourly earnings was sharply lower to zero from a revised 0.2% in May ( was earlier reported at 0.3%) on a year on year basis it is up 2%, which will encourage the doves in the FOMC to hold off on rate hikes. The surprising part of the increase in non-farm payroll jobs which have averaged 243k since January 2014, has been the absence of inflationary pressure on wages. The unemployment rate declined by 2 bps to 5.3%, but this was largely due to a fall in the civilian labor force by 432k which pushed the labor participation rate to record lows to 62.6 which was last seen in October 1977!!

In Eurozone the focus is on Sunday's referendum in Greece and Monday we could see the Euro trade up or down with a gap from its closing level on Friday similar to what happened last week. There were few important Economic data releases from Eurozone this week. Provisional Eurozone CPI in June was in line with expectations increasing 0.2%(Y-on-Y) the core number was up 0.8%. German retail sales for May increased 0.5% from April, which was above market expectations of 0.2% growth. German unemployment hit further record lows as 1k jobs were added in May & this is the ninth consecutive month where jobs have been added.

FOMC Vice-Chairman and FOMC member William Dudley was hawkish in his tone when he mentioned that a September rate hike is "very much in play" if the US economy continues to strengthen, though the Fed could wait until December to start tightening policy. Federal Reserve Vice-Chairman & FOMC member Stanley Fischer was also slightly hawkish in his speech on Tuesday when he said "tentative signs of wage growth" and continued job creation gave him the confidence that US labor market will continue improving & gradually push inflation towards the Fed's 2% target. He did not directly speak about the first rate hike, but mentioned that the Central Bank needed to stay ahead of the curve since monetary policy only affects the economy with a time lag.

Compiled & Researched by: 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.