A Bumpy Ride Ahead
The consequences of the slowdown on China and by extension the global economy are more serious than meets the eye. This requires focused intent, innovative strategies at all levels and efficient delivery mechanisms to successfully negotiate the bumpy ride ahead
China and oil prices hit the headlines in the past week. It is clear that they will impact and shape the future in multiple ways.
The world economy is not well. In spite of bailouts, diverse stimulus packages, a spate of successive incentive plans to boost growth and employment and improve economic fundamentals, the 2008 international financial crisis is yet to be conjured.
For about seven years Europe and the United States have been struggling to find the right policy responses to overcome the crisis.
Against the backdrop of a stunted growth rate in Europe and a fledging growth in the US, there were hopes that the emerging countries and in particular the BRICS countries would provide the much needed impetus to global demand and growth to wrest the world economy out of recession. These hopes have been blunted by poor economic performances registered in three of the five BRICS countries: Brazil, Russia and South Africa. Brazil’s and Russia’s economies shrank by 3.8% and some 4.1% respectively in 2015. Brazil’s economy is forecast to again contract by 3.5% in 2016.
South Africa’s President Jacob Zuma’s ill-advised decision to change three Finance ministers in 4 days left the South African economy reeling with the Rand plummeting by 9.6% to its lowest level ever against the US dollar. In a surge of mounting exasperation, a motion of no confidence was tabled against him to be debated in Parliament. India is the only BRICS country whose growth is forecast by the IMF at 7.5% in 2016.
The declining global demand has led to a slowdown and deceleration of the Chinese economy over the last five years and reversed the momentum of growth. China’s economy was this week announced to have grown by 6.9% in 2015, its slowest growth in 25 years. This rate compares to 7.3% in 2014 and about 10% in 2010. Some experts contend that the real growth rate of China is even lower. This declining trend is expected to continue till at least 2018 as the IMF forecasts China’s economy to grow by 6.3% this year and by 6% in 2017.
The slowdown affecting many advanced countries and emerging economies has therefore led the IMF to downgrade its forecast of world growth for 2016 this week, to 3.4% (compared to 3.6% predicted in October 2015) and to 3.6% next year.
A trend of faltering growth in China, the second largest economy of the world, seen as an engine of demand and growth for advanced, emerging and developing countries in the world does not bode well for the future and the global economy. It adversely affects the business confidence of investors across the world.
Forebodings about China
China’s economic slowdown is already causing tremors across the world. Some reputable global investors such as George Soros and analysts of the world economy are raising serious concerns about the risk of further contraction of the Chinese economy owing to the combination of various vectors of instability.
Markets jitters and the devaluation of the Yuan in August 2015 have caused China’s stock values to fall by about 50% from their peak levels in May-June 2015. This substantial collapse of stock values has continued despite the injection of some US$ 500 billion by China’s central bank during the past six months to halt the free fall. Analysts predict that stocks values could continue to fall by 65% of its high values in June 2015. Is the bubble being rapidly deflated?
A similar significant collapse was experienced in the US stock market in 2008-09 at the outset of the international financial crisis. Analysts have been quick in pointing out the similitude between the present Chinese stock market meltdown with the US turmoil in 2008 and go as far as suggest that China may be beginning to face a financial crisis of its own.
The falling stock values have prompted massive disposal of stocks by Chinese investors and speculators with some investing their capital converted in foreign currency abroad. The resulting capital flight from China is estimated to amount a colossal US$ 1 trillion in 2015. This massive outflow has caused the Yuan to lose a further 6% of its value against the US dollar since its devaluation in August 2015 in spite of some US $100 billion being used in December 2015 by the Central Bank to shore up the currency. Pressure is building for further depreciation of the Chinese currency. There are growing worries that China is losing its grip over its economy and finding difficulties to halt the downward spiral of softening stock values and currency.
More importantly, indications are that the slowdown of the real economy is much worse than the official figure of 6.9% growth in 2015. Assessing such data as electricity consumption by manufactures, the manufacturing sector output which has contracted every month in 2015, industrial production, freight volumes, real investment and prices of industrial goods which have all declined, etc., some experts are suggesting that China’s growth rate in 2015 could in fact average around 5% or even less.
There are also serious concerns about the scale of China’s total debt which has increased from some US$ 7 trillion in 2007 to more than US$ 30 trillion today. Within this crippling Chinese debt, about US$ 2.5 trillion out of US$ 19 trillion of corporate debt represent non-performing business loans. A slowdown of the real economy, falling stock markets, a depreciating currency and declining export revenues put stress on the ability of both private companies and public corporations to service their massive debts with the attendant risk of default. China has already used US $ 1 trillion of its substantial reserves of US$ 3 trillion to shore the stock market and the currency. How much more will it be prepared to spend from its reserves to support the stock market and the currency and the bailout of defaulting corporations, companies and other institutions?
The interdependence of economies in the global economy creates a domino effect. The Chinese reserves comprise for example some US$1.726 trillion in US securities. China’s economic slowdown has already plumbed commodity prices as falling demand forces manufactures to reduce output and orders of raw materials. It has pushed countries like Brazil into severe recession. The steel industry is in a laying off mode.The downward cycle of Chinese stock values has sapped investor confidence and adversely affected values in other stock markets.
The above factors combine to provide a bearish world outlook and create an environment fraught with instability and fears that the world economy still carries potent risks of spawning more financial crises going forward. The eventuality of such risks must be factored in if we are to judiciously and efficiency manage the future and achieve our highest ambitions as a nation.
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The Boon of Lower Oil Prices
Oil prices fell below US$ 27 a barrel this week, hitting its lowest price since 2013. This is mainly due to continuing concerns about the oversupply of crude weighing on the market in the context of weak demand combined with high inventories, the new slump in global financial markets, the economic slowdown in China and the entry of Iran into the oil market following the lifting of Western trade sanctions this week. Iran’s aim to produce 500,000 barrels per day will add to the bearish sentiment in the oil market. Oil prices, which were fairly stable at around $110 a barrel from 2010 to mid 2014, have fallen sharply over the past seven months to current low levels.
The oil market is presently going through its worst downturn since the 1990s. The general view is that plumbed by the glut in the oil market exacerbated by Iranian exports and hardly any prospect of a rise in demand in the context of the global slowdown, oil prices could even fall lower. Oil prices are thus not expected to rise anytime soon. The International Energy Agency even suggests that oil prices will probably need until 2020 to recover. It should however be remembered that in the context of the commitments taken by 185 countries under COP21, the cuts in greenhouse gas emissions will take effect as from 2020 with new commitments for additional cuts made as from 2018. This also means that oil and coal are on the way out. In line with these commitments, all things being equal, the demand for oil is expected to fall.
Such a quantum fall in oil prices has brought windfall gains to all oil importing countries including Mauritius. This is a welcome change from the past trauma of hedging losses underwritten by consumers. It is therefore essential that the CEB make judicious use of these windfall gains to improve its finances, invest in cost effective and more efficient power plants as well as in green technologies to offer a competitive price of electricity benefiting both economic actors and domestic users.
The State Trading Corporation must also urgently put its house in order. Lower oil prices also enable economic operators and exporters to negotiate better freighting terms shorn of bunker surcharges and other similar costs, thereby improving their competitiveness. Similarly, it is equally important in a bid to provide added impetus to tourism, that government urgently review and streamline the diverse and substantial taxes which inordinately burden the price of air tickets.
Oil prices are traditionally used as a cost benchmark to determine the viability or otherwise of investments in the production of energy from other sources such as for example the production of ethanol. Lower oil prices therefore require cogent policy initiatives to support the production of green energy from solar, wind, ocean and geothermal resources, the more so bearing in mind the commitments undertaken under the COP21 Paris Accord.
The advantage of being small
The size of Mauritius, the scale of its economy and our intrinsic resilience are major advantages to succeed even in the present context of global slowdown provided we remain competitive at all times. This is so because in absolute terms, the optimal offer of all our goods and services are small (and even more so at the individual company level) compared to demand for them in our targeted markets. We therefore have to take full advantage of the period of lower oil prices to boost exports and hike growth and employment.
The success registered in terms of a quantum increase in tourist arrivals in 2015 in a difficult world market context is evidence that we have the ability to do so. The avowed aim of becoming a high income economy means that we imperatively also need to take the necessary urgent steps to re-engineer our export offer of goods and services to target up market, skills driven high-value added segments of the world market to maximize net export revenue.
The consequences of the slowdown on China and by extension the global economy are more serious than meets the eye. This requires focused intent, innovative strategies at all levels and efficient delivery mechanisms to successfully negotiate the bumpy ride ahead.
* Published in print edition on 22 January 2016
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