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Daniel Marc Richards - MENA Economist
Published Date: 30 March 2020
As the global number of coronavirus cases has topped 720,000, the ramifications of the attendant shutdown have begun to show up in economic data. On Thursday, US initial jobless numbers showed a record 3.3m new claimants. This far exceeded the 282,000 the previous week, and the consensus prediction of 1.7m, and was over four times that of the previous record. In such an environment it is little surprise that IMF chief Kristalina Georgieva came out and cautioned on Friday that the global economy has entered recession, warning that it would be even more severe than that of the global financial crisis.
Governments and central banks both within the region and globally continue to implement measures aimed at supporting economic growth and liquidity. The ECB has asked Eurozone banks to freeze dividend payments and share buybacks this year in an escalation of its efforts to avoid coronavirus triggering a credit crunch in Europe, the Bank of Canada has cut interest rates by 50bps in an unscheduled meeting, and the Reserve Bank of India cut repo rates by 75bps to 4.40% and the reverse repo rate by 90bps to widen the policy corridor from 50bps to 65bps. Further, the central bank cut the cash reserve ratio by 100bps to 3.0% and introduced TLTROs and couple of other targeted measures to boost liquidity in the system.
Fiscally, the US has passed its USD 2tn stimulus package, Japan is pledging a package worth as much as 10% of GDP, India's government unveiled a INR 1.7trn relief programme aimed at providing buffers for demand. Dubai Free Zones Council has announced an economic package for companies registered in Dubai’s free zones. The package includes postponement of rent payments for six months, facilitating instalment payment, refunding security deposits and guarantees, cancelling fines, and allowing workers to move between companies within the same freezone for the rest of this year on temporary contracts.
However, greater spending pledges combined with diminished revenues are putting a strain on fiscal buffers and there were a slew of downgrades by ratings agencies over the weekend, including South Africa and the UK. In the region, Oman’s sovereign rating was downgraded to BB- and the negative outlook was maintained, indicating a further downgrade may be forthcoming in the next 12 months. Kuwait’s sovereign rating was also downgraded from AA to AA- but with a stable outlook. S&P highlighted both countries’ high reliance on oil revenues and lack of progress on fiscal reform as reasons for the downgrade, although in Kuwait’s case, its sizeable fiscal and FX reserves provide a substantial buffer. By contrast, Abu Dhabi managed to retain its healthy credit rating from S&P, and with a stable outlook.
Lebanon had seen its credit ratings deteriorate already this year, as the country finally confirmed what investors had long feared - that it would not honour its dollar debt obligations owing to the financial and political crisis which had seen FX inflows stall and reserves evaporate. In an investor presentation at the close of last week, finance minister Ghazi Wazni said that the country was committed to wide-scale fiscal reforms aimed at putting the economy back on an even keel. However, given that Lebanon has also been hit by the pandemic, and has seen essential tourism inflows fall to nought, the risks of a hard landing and loss of the currency peg are mounting.
Source: Bloomberg, Emirates NBD Research
Treasuries rose last week as the Federal Reserve unleashed fresh measures to boost liquidity and expanded the type and tenor of securities it intends to buy. Over the course of last week, the Fed expanded its balance sheet by USD 586bn to USD 5.3trn. Treasury and mortgage-backed securities accounted for USD 355bn in Fed purchases. Overall, yields on the 2y UST and 10y UST ended the week at 0.24% (-7bps w/w) and 0.67% (-17bps w/w) respectively.
Over the weekend, the Fed said that it will reduce its UST buying to USD 60bn per day towards the latter half of the week from the current pace of USD 75bn per day.
Regional bonds saw some buying interest return amid risk-on mood in emerging markets. The YTW on Bloomberg Barclays GCC Credit and High Yield index dropped -22bps w/w to 4.63% and credit spreads remained flat at 397bps.
The rating agency S&P made changes to regional sovereign ratings (see Macro section). Further the agency changed the outlook on ratings of five UAE banks to negative. Further, it cut the rating of Damac Properties to B from B+ and placed BBB- ratings of Emaar Properties and Emaar Malls on negative credit watch.
Last week the dollar recorded its largest weekly decline since 1986. After closing the previous Friday at 102.817 the DXY index plunged to 98.313 over the week, more than a 4% drop. The signing of a USD 2.2trn emergency relief package spurred these losses as financial market stresses eased and USD long positions were unwound. News that the US had officially become the global leader in total coronavirus cases added to its softness.
This decline caused currencies paired against the dollar to experience significant gains; EUR rallied over 4% to 1.1142 after starting the week at 1.0695, helped by German parliament approving a USD 814m package to help business in the wake of the virus. USDJPY fell to 107.90 after closing the previous week at 110.81. The biggest winner was GBP which saw an increase of over 7% to 1.2459 after starting the week at 1.1629, despite the stricter lockdown measures announced by British prime minister Boris Johnson, who later contracted the virus. The AUD and NZD were big winners as well, increasing in value by 6.54% and 5.75% respectively.
Regional equities closed mixed. The DFM index and Tadawul added +1.3% and +0.8% respectively while the KWSE PM index dropped -3.4%. It appears at the moment investors are in a process of realigning their portfolios in light of recent developments. The focus remains on the viral outbreak rather than technical catalysts such as index rebalancing or inclusions.
Oil markets have now moved into complete dysfunction with prices for physical barrels threatening to go negative. WTI priced at Midland, a production centre in Texas, closed last week at just USD 13/b while West Canada Select, a benchmark for production in Alberta, settled barely above USD 5/b. The possibility of negative prices in the physical market which we alluded to last week looks highly plausible in the current maelstrom. As for benchmark futures, well at least they stopped declining by double digits: Brent futures closed down 7.6% to end the week at USD 24.93/b while WTI settled at USD 21.51/b, down 4.1%.
Saudi Arabia’s energy ministry was unequivocal about not backing down in its oil market stance. A statement from the ministry said there had been “no contacts” between Saudi Arabia and Russia, with no “discussion of a joint agreement to balance oil markets.” Past rounds of price-war/market-share strategies have lasted months, not weeks, and we see no sign of the Saudi posture easing any time soon. The Kingdom gave no reply to calls from US Secretary of State Mike Pompeo to help settle oil markets, nor was energy part of the G20 communique from a virtual meeting chaired by Saudi Arabia at the end of last week.
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