x Abu Dhabi, UAEThursday 27 July 2017

Filling inflation's vacuum with petrodollars

Some calm is returning to emerging markets despite inflation even as the mood on Wall Street sours.

Some calm is returning to emerging markets despite inflation even as the mood on Wall Street sours. Bernanke and Paulson have cast aside optimism, telling Congress that the turmoil is likely to continue into next year and recommending the Fed have more time and more power to prop up investment banks. Improving labour data did little to improve sentiment. Concerns also continue to mount over the health of Fannie Mae and Freddie Mac, which are crucial to the US mortgage market. The two companies have trillions of mortgage-backed securities on their books, and the White House is now reportedly discussing what to do if one were to falter. This would finally test the long-held assumption in the market that the two companies' debt is implicitly guaranteed by the US government. Fannie Mae and Freddie Mac, which were founded by the US government but which are private companies, have long enjoyed lower borrowing rates on the basis of this presumption, but it has never been tested. With their share prices now in a downwards spiral, that could change.

The White House, true to form, bit at the latest Iranian offer to escalate tensions that serve both sides politically, with Condoleezza Rice issuing a stern rebuke to Tehran following Iran's announcement of a missile test. Pictures of the first test released by Tehran now appear to have been partially photo-shopped to exaggerate their success. But the second test appears to be bona fide. How serious is the risk? Ask Total, the French oil company: they've suspended all investments in Iran. This follows reports that foreign investors have been selling stocks in Dubai and Abu Dhabi. Tehran is running out of time to give Bush a pretext for an attack: only six months until Dubya's out of office.

Analysts on China say inflation is abating but many are still to sanguine about Asia's prospects amid a deepening US downturn. Pig farmers, after having held off raising porkers in order to invest in the raging Chinese stock market, are now chastened by the market's nearly 50 per cent fall and are back to raising pigs. But it seems grain prices and oil prices may still conspire to push up Chinese food prices. News that a black market for rice has emerged in the UAE in response to price caps and that residents are hoarding basmati rice amid rumours of a looming shortage are particularly troubling. Economists seem to agree that growth in the emerging markets is strong enough to withstand monetary tightening to curb inflation.

Despite raging inflation across the Gulf, for example, oil revenues are keeping up, allowing government to pour petrodollars into the hole being created in consumers' pockets. Fitch yesterday upgraded Saudi Arabia 's sovereign ratings on this logic, which is very good news, because corporate borrowing in Saudi is leading a big jump in corporate borrowing across the Middle East. Corporate borrowing in the Middle East rose to US$54 billion (Dh198 billion) in the first half of this year from $44 billion in the first half of 2007 despite the global credit crunch. This could allay concerns that most petrodollars are being recycled into Western assets but not being accompanied by access to credit for the Gulf's booming infrastructure investment needs.

The biggest conduits for recycling those export revenues, the sovereign wealth funds, just wrapped up a meeting in Singapore on transparency that yielded little of it. The IMF's working group on SWFs said it had reached general agreement on a set of voluntary guidelines designed to increase transparency among the funds. The group will hold a third meeting in Chile in September with an aim to finalise the guidelines by October. There guidelines will be voluntary, non-binding, and there will be no way to track compliance nor any way to enforce it. In a word, meaningless. But the scrutiny of these funds is likely to increase, particularly now that the Abu Dhabi Investment Council's purchase of a 90 per cent stake in the Chrysler Building has been completed.