Turkey, Oman vulnerable if central banks hike rates too steeply, says S&P

There is a risk of foreign investors withdrawing funds from emerging markets, said S&P. (Reuters)
Updated 15 December 2017
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Turkey, Oman vulnerable if central banks hike rates too steeply, says S&P

LONDON: Turkey, Oman, Pakistan and Ethiopia are among emerging markets that could be most hurt as central banks in developed countries raise interest rates, according to a report from S&P, the credit rating agency.
In its global sovereign rating outlook for 2018, S&P highlights the danger for emerging markets of accelerated interest rate rises in the years ahead, leading to capital outflows from emerging market securities and a reduction in direct foreign investment (FDI).
That could badly damage the economic model of some emerging economies, but to what extent remains to be seen, said the report.
According to S&P, the emerging market sovereigns most at risk from faster-than-expected monetary tightening are, in descending order: Venezuela, Bahamas, Mozambique, Montenegro, Turkey, Ethiopia, Pakistan, Kenya, Oman and Sri Lanka. Among the large emerging markets, Turkey appears the most exposed at No. 5, said S&P.
The agency said as the recovery of advanced economies gains breadth and depth, including in the euro zone, inflationary pressures could rise and trigger faster monetary normalization (higher rates) by the leading central banks than currently envisaged by the market.
The rub here, as S&P goes on to explain, is that foreign investors would then be sorely tempted to withdraw some invested funds from emerging markets to put back into advanced economies’ securities, which will provide higher real returns than they do currently.
S&P said: “Even relatively small shifts back to advanced economies’ securities relative to their outstanding volume can have a meaningful impact on emerging markets. This is because the capital market is simply so much larger in the advanced economies.”
In recent years, there have been unprecedented portfolio flows into emerging markets shares and other investment instruments that help those countries fund development and secure prosperity.
“But they also create a development model that is dependent on external financing conditions. This renders them vulnerable to sudden stops of capital inflows and possible reversals,” said S&P.
The Institute of International Finance (IIF) estimates that nonresident net portfolio inflows to emerging markets will reach a record $340 billion this year, followed by $435 billion in 2018. In comparison, the average for 2013-2016 was $200 billion.
Excluding flows into China, the average net inflows into emerging markets will still be ­
63 percent higher in 2017 than the average of 2013-2016, said IIF.
Added to these portfolio inflows are sizeable nonresident FDI inflows of close to $500 billion.
S&P said: “Portfolio inflows have grown particularly fast in recent years. And it is these portfolio flows that can be more volatile, potentially reversing direction very rapidly when confidence wanes or alternative investment opportunities open up.”
There is a strong correlation between vulnerability to monetary tightening and the sovereign rating.
According to S&P, the average rating of the 10 most vulnerable sovereigns is “B” and none of them carry an investment-grade rating. At the other end of the spectrum, the average rating of the 10 most resilient sovereigns is “BBB,” it said.
 


Saudi Arabia seeks stable, not soaring, oil prices

Updated 22 September 2018
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Saudi Arabia seeks stable, not soaring, oil prices

  • Due to market tightness, Brent rose to nearly $80 per barrel but deteriorated to $78.80 on Friday.
  • The average price for Brent crude per barrel over the past five months has been between $72.11 and $76.98

RIYADH: Oil prices rose this week on continuing market tightness. With the price rise, some Saudi-bashing has begun. Bloomberg reported that increasing prices were due to Saudi Arabia’s comfort with Brent crude above $80 per barrel. Such “analysis” is hogwash.

Due to market tightness, Brent rose to nearly $80 per barrel but deteriorated to $78.80 on Friday. WTI rose above $70 per barrel for the first time in three months and settled at $70.78 per barrel by the week closing.
The average price for Brent crude per barrel over the past five months has been between $72.11 and $76.98. As may be noted in those numbers, the Brent crude price has been resisting the psychological barrier of $80 per barrel. The fact is that, since October 2014, the Brent monthly average has never gone above $80.
The oil price outlook might be raised as a result of this upward tendency and the continuing tight oil market. For instance, with the latest numbers in hand, HSBC has revised its oil price forecast upward with Brent to average $80 per barrel in 2019 and $85 in 2020, before settling at about $75 in 2021.
Bloomberg was inaccurate about Saudi Arabia’s comfort with a Brent price above $80 per barrel. The Kingdom has never been among the bulls when it comes to oil prices. Again and again, Saudi Arabia has been a major advocate for stable oil prices, not increasing oil prices, which it views as unsustainable and damaging to the global economy. Bloomberg is also predicting that Saudi Arabia will follow its allegedly bullish nature and refrain from ramping up production to compensate for the oil lost once the US sanctions on Iran come into effect.
US Secretary of Energy Rick Perry has confirmed that Saudi Arabia, Russia and the US are well able to add enough crude oil supply into the market to compensate for Iran. Indeed, the Kingdom has begun to increase output to adjust for market needs, from 9.87 million barrels per day (bpd) in April to 10.42 million bpd in August.
The upward movement in oil prices came after strong fundamentals showed market tightness that spurred record levels of speculative traders, with nearly all betting on higher prices. The price rise also recognized that total US inventories are below the five-year average for the first time since May 2014. Oil prices have been gradually trending upward with gentle fluctuations. There have not been any steep surges or declines. There is nothing artificial about the trend. In reality, it is boringly predictable.
Last month, the International Energy Agency (IEA) reported OECD commercial crude oil inventories at 32 million barrels below the five-year average. Stocks at the end of Q2 2018 were up 6.6 million barrels versus the end of 1Q 2018, the first quarterly increase since 1Q 2017. The IEA also noted that global refinery throughputs in the second half of 2018 are expected to be 2 million barrels higher than in the first half of the year. These refined products stocks will draw down before building again in 4Q 2018.
Global crude oil inventories peaked in 2016. The OPEC+ agreement that worked for market balance was the reason for a fall in inventories. Since May 2017, global oil stocks have been on the decline and now global crude oil stocks are below the five-year average. Product stocks are also below that level, with strong demand and healthy refining margins.
Inventories have kept falling despite American producers pumping at all-time highs last month. It is only the massive flood of oil from the US which has kept crude oil prices at low levels from early 2015 to the end of 2017 — along with a resulting lack of upstream investment in the oil industry. Therefore, the IEA predicts that in 2022 spare production capacity will fall to a 14-year low.
Global oil markets are rebalancing. Oil prices started their upward momentum from the end of October 2017. They went above the psychological barrier $60 a barrel after 10 consecutive months of tireless efforts by OPEC and non-OPEC nations that started on January 2017. The market rebalancing will continue through the end of 2018, and beyond.
Such upward momentum in oil prices isn’t artificial movement because it came after many months without steep price fluctuations. In 2016, the Brent price average was $43. The 2017 Brent price average was $54, and prices just surpassed $60 in October 2017. The Brent average surpassed $70 in late March 2018 and has been hovering between $72 and $78 since. There is no evidence of a steep fluctuation or an artificial movement.
The claims of an artificial price movement have come just at the time when OPEC and the world are reaping the positive outcomes of 24 nations collaborating in output cuts that managed to successfully rebalance the oil market in a situation where global oil inventories were running at record highs. Also, these false claims came when the oil industry needs capital inflows to reactivate upstream investments for major international oil companies. Such investments are essential for the price stability that benefits oil producers and consumers globally. Low oil prices result in low investment in discovery and production of petroleum resources, which damages various industry sectors and energy needs. That leads to a vicious cycle of up-and-down price fluctuations.