China’s GDP reports are of critical importance for emerging markets throughout the MENASEA region, but particularly those in Southeast Asia that depend on Chinese growth to support their own economies. The 6.9% growth rate for the September quarter in China (beating estimates) could indicate some stabilization for emerging markets and that is how markets appear to be reacting with Asian currencies like the Ringgit, Rupiah and Aussie dollar not moving dramatically. The emerging market woes may not be over yet but a recent pause in the depreciation gives them a chance to catch a breath of fresh air as China fails to collapse (as many had expected based on the stock market collapse) and the Fed wait on rate hikes (some said the Fed was ‘in the zone’ to begin hiking rates).
Finance Forward Reflections on the Nobel Laureate in Economics being awarded to Angus Deaton
The Nobel Memorial Prize in Economic Sciences was awarded to Princeton University Professor Angus Deaton and the most important area of his research for what is important for us at Finance Forward is his focus on development economics. The range of countries which we cover—from Morocco in the West to Indonesia and the Philippines in the east (the MENASEA region) – are all emerging markets and our interest in these economies is not just in the aggregate GDP but in how well the growth is improving lives of the people who live within these countries.
One of the important insights from Professor Deaton’s work is the idea that what matters is not solely the aggregate economic data (total GDP, total consumption) but the population’s welfare which depends on overall economic wealth but also inequality and the rate of poverty. However, during a Presidential Address to the American Economic Association in 2010, Professor Deaton added that “in my discussion of international inequality, I emphasized the difficulties of making comparisons of real income between countries, especially countries with very different relative prices and economic structures”.
The MENASEA economies include a range of countries from small oil-exporters to diverse (oil-importing) economies; from those which are tied inextricably with Europe by their geographical location and history to those with more orientation to Africa or China. While Professor Deaton’s work highlights in very stark terms the difficulty in comparing different countries to one another, his work in this area also remains convinced of importance of looking at emerging markets from an international, cross-country perspective.
The economic structure of the Moroccan economy differs greatly from that of Qatar or Malaysia but they are all home to people whose satisfaction with their economic station in life is not satisfied solely as a result of the dollar per capita level of GDP. There isn’t an ideal way to set an international poverty line to calculate the number of people whose welfare is diminished because they live in poverty across Morocco, Qatar, Malaysia or the many other countries that make up the MENASEA region.
We have to make do with the imperfect data that does exist and count on people like Professor Deaton to improve its comparability (and be aware of the imperfections in the methodology that would suggest an economic relationship where none exists). The gritty details that some of Professor Deaton’s work focuses on (his AEA speech describes the implications of the price of “smoked bonga, in simple wrapping, open product presentation, a piece of approximately 200 grams” on poverty measurements) could be seen as putting the ‘dismal’ in dismal science but it is hugely important work.
For economics and economists to overcome the objections that have come its way for many years that it is only concerned with representative consumers and not individual people, it needs to better understand how actual people think and act. This includes both small issues (how the types of fish that consumers demand in different parts of the developing world affect poverty measurement) to big ones (how consumers’ religious beliefs affect their economic actions) economics.
We are conscious of the differences between people across the MENASEA region and we hope that Professor Deaton’s Nobel recognition highlights the importance of thinking not just of economies and markets but of the welfare of the people whose economic decisions make the markets go.
Will there be enough breathing space for the UAE banking sector as liquidity evaporates?
Falling oil prices did not seem to affect the UAE banking sector through the first two quarters of 2015 as banks continued to show stronger asset growth and a decline in non-performing loans along with healthy profits. However, if the oil price decline persists over a longer period, the ‘robust banking system’ will not remain unaffected. The downbeat trend which shows up in the latest macroeconomic forecasts as well as in global financial markets which continue to sporadically get battered by the commodity price volatility and the slowdown of the Chinese economy will affect economic growth of the UAE as well.
A look into some of the figures posted by the Central Bank of the UAE highlights the vulnerabilities that the UAE banking sector might be exposed to going forward. Although banking sector liquidity has improved significantly since the 2008 economic downturn as the Net Loans to Deposits (LTD) ratio touched a historical low in June 2014, the LTD ratio has been increasing during the last 3 quarters mainly because of the decline in government and public deposits (a big source of which is from oil sales receipts). This trend is expected to continue for as long as oil prices remain significantly lower than the budget break-even level which for the UAE has been estimated to be between $70 and $80 per barrel.
This will hurt the deposit liquidity of the banks and the UAE banking sector will likely be facing a tougher funding environment as governments will begin to not only stop placing deposits with banks but will draw down their deposits to cover up the budget deficits at the back of low oil prices. Under a dried up liquidity situation, money markets rates are likely to continue to rise; during the past few weeks where the UAE’s interbank shot up to 0.46 percent from 0.10 percent where they hovered for the past two years.
This spells trouble for the loan growth in the region because a higher loan-to-deposit ratio means there is less liquidity available for banks and some may need to turn to the money markets to fill the gaps. However, when the interbank market tightens as well due to the liquidity pressures in the banking system as a whole, it will hit the net interest margins of the banks which were already constrained by the global low interest rate environment. Margin compression coinciding with slower loan growth would hit the profitability of the banking sector.
The sector breakup of loans by economic activity as shown below can give some indication of what sectors would be most likely to account for rising NPLs. Despite the bitter experience during the property bust during the last financial crises, UAE banks still have a high exposure (one-sixth of their aggregate loans) to the construction and real estate sector. Some of the regulations implemented following the financial crisis may limit the spillover from an economic slowdown into the banks’ loan books.
Given that the property prices have fallen significantly since 2014 and transactions have halved (suggesting that sentiment towards the sector has not turned positive), the risk exposure of banks from further real estate price falls. If prices continue falling as NPLs build, the banks will have to raise their provisions which would compound the squeeze on their profitability. UAE banks maybe well capitalized and cushioned to withstand such losses, but if the oil price levels hold or fall further and economic activity from other sectors like trade stays muted, then the banking system may feel greater stress in the future.