Future of Saudi economy about policy, not prices says S&P chief

Market reforms are more important than the oil price in determining the trajectory of the Saudi economy, according to S&P. (Reuters)
Updated 27 January 2018

Future of Saudi economy about policy, not prices says S&P chief

LONDON: Saudi Arabia’s prospects depend more on government reforms becoming “irreversible” than the price of oil, said Moritz Kraemer, global chief rating officer for S&P in an interview with Arab News.
He said: “If oil went to $100 per barrel again there would be a risk of undermining the reform momentum — and helping those campaigning to maintain the previous status quo.
“We don’t think the oil price will determine the fate of the country. The policies that are chosen will determine future economic stability,” said Kraemer.
He added that S&P’s forecast for the average price of crude in 2018 was $60 a barrel, falling to $50 a barrel in 2019, underlining how important it was that KSA reduced its dependence on crude to secure prosperity.
Kraemer said today’s Saudi Arabia contrasts with to an earlier era when there “had been so many internal, opaque checks and balances that you really never had any policy momentum developing in any direction. There was a sort of stagnation in policy-making.”
Looking at recent reform initiatives in KSA, Kraemer noted that the objectives were very demanding, but would most likely be met in the timeframe laid out. However, what was really important was “the direction of travel,” namely bringing in more private capital, to develop the country, “whether that happens slower or faster is less important than the irreversibility of the process,” he said.
The Kingdom should maintain growth of spending, and one way of trying to achieve this was by getting the private sector more involved in service delivery, health and education and also infrastructure.
Asked whether investor appetite for Saudi debt was good, Kraemer said yes, and this was seen when the government issued bonds for the first time in 2016 — with the $17.5 billion offering oversubscribed four times.
But the domestic capital market still needs developing. The take-up of Saudi government bonds was largely, but not exclusively, by foreign investors. The local market was relatively undeveloped compared to countries such as Turkey and the UAE, he said.
To remedy matters, Kraemer said regulation needed to be “more helpful,” although the authorities were working on improvements.
The assignment of credit ratings to Saudi companies would help domestic corporates to raise debt both at home and abroad — but for this to happen KSA groups would have to disclose more details about their affairs, he said.
In the context of Vision 2030, Kraemer flagged up significant financing needed for infrastructure projects. “We foresee a lot of activity linked to PPPs (public private partnerships). Funding would be partly covered by the banks, but some would have to come from debt markets,” said Kraemer.
With interest rates rising, he was relaxed about the effect on KSA. During S&P studies, the Kingdom regularly showed up as least vulnerable to the threat of outflows of foreign capital in a rising interest rate environment.
Turkey was among the countries most at risk, he said, but Qatar also had issues.
He said: “If you look at what Qatar needs to borrow compared to how much foreign exchange reserves they have, and how much current account receipts they have, it looks quite weak. They need to pay and borrow more than KSA — not in absolute terms, but relative to their export receipts.”
On the other hand, Qatar had substantive external investments, and “a hugely liquid portfolio of foreign bonds and shares that they could run down if there was a squeeze, so they were well buffered.”
Saudi debt would not reach anywhere near something that “could be described as alarming,” according to S&P forecasts, he said.
According to the World Bank’s 2018 outlook on the Middle East and North Africa, growth in the region is expected to jump to 3 percent in 2018 from 1.8 percent in 2017.
Growth in Saudi Arabia was forecast to accelerate to 1.2 percent in 2018 from 0.3 percent in 2017, while in Egypt, growth is anticipated to pick up to 4.5 percent from 4.2 percent last year.
In a report at the end of 2017, S&P said its stable outlook on KSA was based on the expectation that the Saudi authorities would continue to take steps to consolidate public finances and maintain government liquid assets close to 100 percent of GDP over the next two years.
It added: “We think the risks emanating from recent shifts in Saudi Arabia’s political power structures and societal norms, alongside various regional stresses, are balanced by the possibility that these structural reforms could empower Saudi citizens and make Saudi Arabia more attractive to investors over the medium term.”
But S&P said its ratings could come under pressure if it observed a significant increase in domestic or regional political instability as a result of the increasing centralization of power.


Powell: No clear hint on rates but says Fed will aid economy

Updated 23 August 2019

Powell: No clear hint on rates but says Fed will aid economy

  • The outlook for the US economy, Powell said, remains favorable but continues to face risks
  • Trump, who has relentlessly attacked Powell and the Fed over its rate policies, kept up his verbal assaults on Twitter

WASHINGTON: Federal Reserve Chairman Jerome Powell sent no clear signal Friday that the Fed will further cut interest rates this year but said it would “act as appropriate” to sustain the expansion — phrasing that analysts see as suggesting rate cuts.
Powell said President Donald Trump’s trade wars have complicated the Fed’s ability to set interest rates and have contributed to a global economic slowdown.
Speaking to a gathering of central bankers in Jackson Hole, Wyoming, Powell didn’t give financial markets explicit guidance on whether or how many rate cuts might be coming the rest of the year. The Fed cut rates last month for the first time in a decade, and financial markets have baked in the likelihood of more rate cuts this year.
The outlook for the US economy, Powell said, remains favorable but continues to face risks. He pointed to increasing evidence of a global economic slowdown and suggested that uncertainty from Trump’s trade wars has contributed to it.
Reacting to the speech Friday, Trump, who has relentlessly attacked Powell and the Fed over its rate policies, kept up his verbal assaults on Twitter:
“As usual, the Fed did NOTHING!” Trump tweeted. “It is incredible that they can ‘speak’without knowing or asking what I am doing, which will be announced shortly. We have a very strong dollar and a very weak Fed. I will work “brilliantly” with both, and the US will do great.”
Trump added:
“My only question is, who is our bigger enemy, Jay Powel (sic) or Chairman Xi?“
Powell’s speech comes against the backdrop of a vulnerable economy, with the financial world seeking clarity on whether last month’s rate decision likely marked the start of a period of easier credit.
The confusion only heightened in the days leading to the Jackson Hole conference, at which Powell gave the keynote address. Minutes of the Fed’s July meeting released Wednesday showed that although officials voted 8-2 to cut their benchmark rate by a quarter-point, there was a wider divergence of opinion on the committee than the two dissenting votes against the rate cut had indicated.
The minutes showed that two Fed officials favored a more aggressive half-point rate cut, while some others adopted the polar opposite view: They felt the Fed shouldn’t cut rates at all.
The minutes depicted the rate cut as a “mid-cycle adjustment,” the phrase Powell had used at his news conference after the rate cut. That wording upset traders who interpreted the remark as suggesting that the Fed might not be preparing for a series of rate cuts to support an economy that’s struggling with a global slowdown and escalating uncertainty from President Donald Trump’s trade war with China.
There was even a difference of opinion among the Fed members who favored a rate cut, the minutes showed, with some concerned most about subpar inflation and others worried more about the threats to economic growth.
Comments Thursday from Fed officials gathering in Jackson Hole reflected the committee’s sharp divisions, including some reluctance to cut rates at least until the economic picture changes.
“I think we should stay here for a while and see how things play out,” said Patrick Harker, the president of the Fed’s Philadelphia regional bank.
Esther George, president of the Fed’s Kansas City regional bank and one of the dissenting votes in July, said, “While I see downside risk, I wasn’t ready to act on that relative to the performance of the economy.”
George said she saw some areas of strength, including very low unemployment and inflation now closer to the Fed’s target level. She said her decision on a possible future rate cut would depend on forthcoming data releases.
Robert Kaplan, president of the Fed’s Dallas branch indicated that he might be prepared to support further rate cuts.
If “we are seeing some weakness in manufacturing and global growth, then it may be good to take some action,” Kaplan said.
George was interviewed on Fox Business Network; Harker and Kaplan spoke on CNBC.
The CME Group, which tracks investor bets on central bank policy, is projecting the likelihood that the Fed will cut rates at least twice more before year’s end.
Adding to the pressures on the Fed, Trump has kept up his attacks on the central bank and on Powell personally, arguing that Fed officials have kept rates too high and should be cutting them aggressively.
Trump has argued that a full percentage-point rate reduction in coming months would be appropriate — a suggestion that most economists consider extravagantly excessive as well as an improper intrusion on the Fed’s political independence.
The president contends that lower rates in other countries have caused the dollar to rise in value and thereby hurt US export sales.
“Our Federal Reserve does not allow us to do what we must do,” Trump tweeted Thursday. “They put us at a disadvantage against our competition.”
Earlier in the week, he had told reporters, “If the Fed would do its job, you would see a burst of growth like you have never seen before.”
Powell has insisted that the White House criticism has had no effect on the Fed’s deliberations over interest rate policy.