As euro zone economy shrinks, govt debt loads grow

Updated 18 November 2012
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As euro zone economy shrinks, govt debt loads grow

FRANKFURT: Europe's government-debt crisis is no longer panicking financial markets. But it won't end until the region's economy starts growing strongly again.
And that will be a while.
The economy of the 17 countries that use the euro has shrunk for two straight quarters — a common definition of a recession — and analysts forecast little or no growth until 2014.
Without growth, there won't be enough tax revenue to help countries like Greece, Italy, Spain and Portugal narrow their deficits and slow the expansion of their debts. Their debt burdens as a percentage of economic output, a key measure of fiscal health, look worse by the day.
The euro zone's combined debts are equal to about 93 percent of the region's gross domestic product this year and that figure is forecast to rise to peak at 94.5 percent next year. In 2009, the euro zone's debt-to-GDP ratio was 80 percent. A ratio above 90 percent is generally considered high and can put pressure on governments' borrowing costs.
"The worrying thing about the projections is, the peak seems to keep moving," says Raoul Ruparel of the Open Europe think tank.
The panic in European financial markets has eased in recent months largely because of aggressive action by the European Central Bank. The ECB said on Sept. 6 that it was willing to buy unlimited amounts of government bonds issued by countries struggling to pay their debts. That pledge quickly lowered borrowing costs for Spain and Italy, which earlier in the year faced the same kind of financial pressure that forced Ireland, Greece and Spain to seek bailouts.
But stemming the crisis and heading off a default by one or more countries aren't the same as stimulating growth. The US economy remains weak several years after actions by the Federal Reserve helped arrest its financial crisis.
Europe's economy is being held back for several reasons:
— Austerity. Whether they got into trouble by overspending or after rescuing banks from a real-estate collapse, European governments are tackling their debts the same way: By raising taxes and cutting spending, including wage cuts for public sector workers. Italy slashed its deficit by 2.8 percent of GDP this year, but economists estimate that reduced growth by 1.5 percentage points. Less spending by the government and less spending by consumers who gave more of their income to the government were a drag on the Italian economy.
— Shaky banks. Banks reeling from the financial crisis are making it harder and more expensive for businesses in the hardest-hit countries to borrow. That's crimping investment and hiring by these companies across southern Europe. Companies in Greece or Portugal are often paying twice as much interest on loans as their German competitors.
— Consumers are holding back. Wage cuts have weighed on family budgets, and people are saving more because they're worried about further economic shocks. Together, these trends have reduced consumer spending by about 1 percent this year.
— Anti-business regulation. Laws in many European countries make it hard for companies to lay workers off in lean times, and that makes employers reluctant to hire. Bureaucracy chokes the process of starting a business or exporting goods. Greece's tax accounting rules were so onerous — permitting large penalties for minor paperwork errors — that the EU demanded the entire rulebook simply be abolished. Parliament finally complied last week.
European governments are slowly trying to make their economies more competitive. But in a September survey on global competitiveness by the World Economic Forum, Greece, Portugal, Spain and Italy ranked low because of poor access to financing and rigid labor markets.
It requires 11 bureaucratic filings to start a business in Italy. Fellow euro member Slovenia requires two.
Eurostat data released Thursday showed that for the second straight quarter the euro zone economy contracted. Output shrank by 0.1 percent in the July-September quarter, compared with the previous quarter.
The European Union's executive commission forecasts the euro zone economy will shrink 0.4 percent for all of 2012 and grow by just 0.1 percent in 2013.
Without growth, there's little chance of cutting into an 11.6 percent jobless rate, the highest since the euro was introduced in 1999. Unemployment tops 25 percent in Greece and Spain.
Even with a modest recovery in late 2013 and 2014, the euro zone economy will be smaller — adjusted for inflation — than it was in 2008, when the Great Recession reverberated around the world.
Marco Valli, chief European economist for Unicredit, has charted recoveries from five crises going back to the late 1970s. He forecasts that the euro zone economy will not recover to its 2008 level until the first six months of 2015.
"This is unusual, in that even during the major financial crisis of the past, we have never seen such a slow recovery from a financial crisis," he says.


UAE sovereign wealth fund Mubadala pays $271m for stake in Gazprom oil subsidiary

Updated 15 min 10 sec ago
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UAE sovereign wealth fund Mubadala pays $271m for stake in Gazprom oil subsidiary

  • Abu Dhabi’s state-owned Mubadala Investment Company (MIC) has agreed to pay $271 million for a 44 percent stake
  • Move underpins a strengthening alliance between Moscow and Opec’s Middle East countries

LONDON: Abu Dhabi’s state-owned Mubadala Investment Company (MIC) has agreed to pay $271 million for a 44 percent stake in an oil subsidiary of Russian gas giant Gazprom. 

The move underpins a strengthening alliance between Moscow and Opec’s Middle East countries, which joined forces to agree a supply-cut deal 18 months ago to stabilize the oil market after the price crashed in late 2014.

“This cements the link between GCC countries and Russia,” Giorgos Beleris, a Dubai-based oil analyst for Thomson Reuters, told Arab News.

Richard Mallinson, co-founder of London research consultancy Energy Aspects and a research associate with the Oxford Institute of Energy Studies, told Arab News that the GCC, and particularly the Saudis, had been talking “about aligning their goals in discussions about whether to extend a cap on crude production beyond 2018.” 

“They are after long-term cooperation, not just a short deal,” Mallinson said.

Shakil Begg, head of oil research for Thomson Reuters in London, said that joint ventures between Russian and Middle Eastern energy companies had become more common.

He added that Russia was still affected by certain sanctions, “so for them, it’s about getting access to technology and expertise.”

“Additional Gazprom production that could come on line is in difficult areas, such as the Arctic,” he said.

A joint statement about the deal from the UAE and Gazprom underlined Begg’s point. 

“For the first time, one of the largest investment funds in the UAE has invested in the Russian assets of Gazprom Neft, based in Western Siberia. The task of beginning cost-effective development of Paleozoic stocks can be more effectively solved within the framework of partnership, combining technological and financial resources,” the statement said.

Importantly, the two companies can make use of each other’s customer base in the Far East where demand, especially from China and India, has been strong.

MP said on its website: “(Our) major projects include exploration, development and production activities in Thailand, Indonesia, Malaysia and Vietnam, where we operate the majority of our assets.

“Southeast Asia continues to be the core region of our operated activities where we have developed an excellent track record of safe and efficient operations,” it added.

In 2017, MP’s average working interest production was about 320,000 barrels per day of oil equivalent.

Begg said: “It appears like this deal is strategic to obtaining a greater share of the light crude market in the Far East.

“The deal involves crude production from several fields operated by Gazprom Neft which feed the ESPO pipeline that supply a number of Chinese refineries and a few in Japan. Given the quality of Russian ESPO is similar to the main crude onshore crudes produced by the UAE (also sold to consumers in the Far East), it is possible that Mubadala are trying to retain/increase its market share in Asia.”

The growing Russian/GCC alliance was underlined recently when Russian energy minister Alexander Novak said a joint organization for cooperation between OPEC and non-OPEC countries may be set up once the current deal on oil output curbs expires at the end of this year.

Saudi Crown Prince Mohammed bin Salman told Reuters in March that Saudi Arabia and Russia were working on a historic long-term pact, possibly 10 to 20 years long, that could extend controls over world crude supplies by major exporters.

Announced at the St. Petersburg Economic Forum, the Russia/UAE agreement is between Gazprom, the Russian Direct Investment Fund RDIF) and MIC offshoot, Mubadala Petroleum (MP).

A statement by RDIF, the sovereign wealth fund of Russia, and MP said that it was creating a joint venture with Gazprom Neft to develop several oil fields in the Tomsk and Omsk regions.

RDIF and Mubadala Petroleum will acquire a 49 percent equity stake in Gazpromneft-Vostok, the operator of the fields. Mubadala Petroleum will hold 44 percent and RDIF 5 percent.

Kirill Dmitriev, CEO of the Russian Direct Investment Fund (RDIF), said: “(This deal) brings the experience and expertise of our Middle East partners to the Russian oil and gas sector. (We) see this as the first step in creating a consortium to pursue further significant investments in the sector.”

Dr. Bakheet Al Katheeri, CEO of Mubadala Petroleum, said: “Through this new partnership, we will not only share but also further build on our expertise and capabilities in oil and gas while adding significant oil production to our existing oil and gas portfolio.”

Gazpromneft-Vostok controls seven subsoil licenses in Tomsk and the neighboring Omsk region; these contain both mature and undeveloped oilfields. Its proven and probable reserves stand at 296 million boe (barrels of oil equivalent), of which more than 80 percent is crude oil. According to the Russian energy ministry, the company produced 1.64 million tons (33,000 bpd) of oil in 2017, down 3 percent year on year.

Gazprom is looking to divest stakes in non-core assets to pay for its capital-intensive projects in the Arctic, namely the East-Messoyakhinskoye, Novoportovskoye and Prirazlomnoye oilfields, according to a report by Edinburgh-based website NewsBase.com.

In February, the company reportedly sold the West-Noyabrskoye field in Yamalo-Nenets to an unnamed buyer, and it is also looking to unload stakes in the Neptune oilfield off the coast of Sakhalin and the Chonsky project in Eastern Siberia. Gazprom Neft reported free cash flow of 65 billion rubles ($1.15 billion) at the end of 2017, versus a negative value a year earlier, NewsBase said.