World Business and Economic Analysis
World Business and Economic Analysis
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By Elizabeth Matsangou
The IMF supports central banks adopting minus-zero nominal rates.
The International Monetary Fund (IMF) spoke out in support of central banks adopting minus-zero nominal rates. While recognising the risks associated with negative interest rates – including the potential for inflation – slow growth and ‘boom and bust’ cycles, the international lender defended their implementation.
Since 2012, six major economies have now introduced negative interest rates, which the IMF argues helps to ease financial conditions and provide further monetary impetus, which in turn can help to boost demand, as well as price stability.
The first to opt for the unconventional strategy was the Danish National Bank in 2012, followed by the European Central Bank and the Swiss National Bank in 2014. The Swedish Riksbank adopted negative policy rates the subsequent year, while so far in 2016, the Bank of Japan and the Hungarian National Bank have followed suit as well. In fact, according to Reuters, around one fourth of the global economy is experiencing minus zero rates.
As explained by the IMF, the aim of negative rates is to motivate the private sector to increase spending, while for smaller economies, they can also help to deter capital inflows and the pressures of exchange rate appreciation. Although the impact of negative policy rates is mixed and dependent on the unique nuances of each respective economy, success has been seen in Denmark in terms of a reduction in the country’s capital inflows.
Given the novelty of negative nominal interest rates, (as opposed to negative real rates), both time and study is required to ascertain their long-term effectiveness. Nonetheless, the IMF concludes that they can indeed “help deliver additional monetary stimulus”. As such, it is reasonable to presume that more countries can be expected to adopt the somewhat unconventional strategy throughout the coming year and beyond.
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Saudi Arabia is raising $10 billion from a consortium of global banks as the country embarks on its first international debt issuance in 25 years to counter dwindling oil revenues and reserves.
The landmark five-year loan, a signal of Riyadh's newfound dependence on foreign capital, opens the way for Saudi Arabia to launch its first international bond issue. It comes as the sustained slump in crude encourages other Persian Gulf Arab governments, such as the UAE, Qatar and Oman, to tap international bond markets, news outlets reported.
The oil-rich kingdom, which last weekend blocked a potential deal among oil producers to freeze output and bolster prices, has burnt through $150 billion in financial reserves since late 2014 as its fiscal deficit is set to widen to 19% of gross domestic product this year.
Strong interest in the loan, especially from Asian banks, came despite rating agency downgrades on Saudi creditworthiness since the oil price collapsed. The government raised the amount it wanted to borrow from $6 billion-$8 billion to $10 billion after the deal was oversubscribed.
"The deal is very successful, with very competitive pricing," said Elyas Algaseer, deputy regional general manager at Bank of Tokyo-Mitsubishi. "There was immense market appetite."
Saudi Arabia may now raise its first global bond in the wake of the loan deal, bankers said. Institutions that loaned the most would be set to benefit from a mandate to help Riyadh raise the bond.
The strategy of raising debt overseas aims to slow the drawdown of foreign reserves and reduce pressure on local banks, which have been supporting state related companies and buying Saudi domestic bonds for almost a year.
Under Pressure
Saudi Arabia has problems. The country is facing pressure from a variety of angles. Even its long-standing relationship with the United States is on the rocks, with renewed public scrutiny of alleged links between Saudi officials and the 9/11 plotters just the tip of the iceberg.
On Monday Saudi Arabia is set to release the widely anticipated “Vision for the kingdom of Saudi Arabia,” a blueprint for diversifying its economy away from its reliance on the country's gargantuan oil industry and to stop wasting billions of dollars each year.
"How many billions were wasted exactly? Well, we know that Saudi Arabia ran a deficit of $98 billion last year," and in a lengthy new profile from Bloomberg Businessweek, Mohammed Al-Sheikh, a financial adviser to the Saudi state, reluctantly estimates that over the past few years, there had been "$80 to 100 billion of inefficient spending.”
Slashing Subsidies
Oil had long been the country's only viable export, accounting for 90% of the state budget. In the new reality of cheap oil, things are going to have to change: The Saudi government has already begun slashing some of the more generous subsidies it gives Saudi citizens—raising the price of gasoline within the country by 50% in December (though it still stands at a remarkably cheap 24 cents a liter).
A variety of other moves have also been rumored: further cuts to state benefits and subsidies, the introduction of a value-added tax on luxury goods and sugary drinks, attempts to tap into new mining resources and a new tourism push are all said to be under consideration.
In an earlier interview with the Economist, Mohammed bin Salman had suggested that what Saudi Arabia was planning bore some similarities to the privatizations of state industries in Britain in the 1980s. "Most certainly," the prince had responded when asked whether "this was a Thatcher revolution for Saudi Arabia."
Massive Unemployment
Mohammad's ambitious economic "vision" to diversify the economy could include five million new jobs for the kingdom.
About 70% of the population of Saudi Arabia is under 30, and more than 30% of that is unemployed. Five million new jobs would mean one new job for roughly every six people in the country.
Unemployment is rated as one of the world’s highest for a national unemployment rate. As for unemployment among women, it has reached 32.8%. The figure is the highest in the world, according to the International Monetary Fund.
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