The slump in oil prices has driven many export-dependent economies to adopt austere measures. Abandoned labourers haven’t seen a paycheck since long.
By Ritesh Jain
Low oil prices are good for countries like India, which depend largely on imported energy. While we go gung-ho over lower import bills, one aspect that is silently creeping up now is the other side of lower energy prices. While the gains from lower energy import bill has been immediately accounted, improving the country’s fiscal health, what is not been talked about much is the impact of lower oil prices on inward remittances and even less discussed is the human aspect. This article from Bloomberg talks about the developing labour crisis in West Asia as a result of lower oil prices.
Stranded in desert: The cost of low oil price The slump in oil prices has driven many oil exports dependent economies to adopt austere measures and cut down on non-essential expenditures. As Saudi authorities slash spending and delay payments to contractors to cope with the plunge in oil prices, the austerity is exacerbating the woes of private businesses that have, for decades, relied on government spending for growth. Casualties include the thousands of foreign laborers who helped to keep the economy humming with low-paying jobs in construction. Owed weeks and weeks of back pay from construction companies squeezed by the kingdom’s economic slowdown, thousands of foreign laborers from South Asia face the grim uncertainty of how long their plight will continue.
Abandoned labourers, including nearly 16,000 from India and Pakistan alone, according to their governments, haven’t seen a paycheck in about eight months. Under a system of sponsorship known as kafala that leaves many workers at their employers’ mercy, they’re also not being given the exit visas they need to leave the world’s largest oil exporter. In Saudi Arabia, it’s up to employers to arrange such visas, but before doing so they’d have to pay back wages and end-of-service benefits. More than half of India’s $70bn of inward remittances comes from the middle-east. This is precious foreign exchange for India. This is already showing in the form of a slowdown in inward remittances. The kingdom has for decades provided millions of foreign laborers with jobs that have allowed them to improve the lives of families left behind. In 2014, it ranked second behind the U.S. as the biggest source of workers’ remittances, according to World Bank data.
Yet as oil prices plummeted, government efforts to repair public finances hit a construction industry already struggling amid a building slowdown. Living conditions are pathetic, medical aid is next to none having lost their insurance policies with the loss of jobs. Spending cuts will slow economic growth this year to the lowest level since the global financial crisis, according to a Bloomberg survey of economists.
With no income, some of the workers have turned to relatives or friends for loans. The future is bleak for these workers if oil prices stay at these levels.
A primer on savings & investment Saving and investment rate are showing nascent signs of recovery after declining post the credit crisis. Favourable demographics put India in a better position, but improvement in productivity dynamics is critical to ensuring a virtuous cycle of higher saving and investment. India's saving rate rose sharply between 2003 and 2008, led by an improvement in the savings rate of the public and private corporate sector. However, post the credit crisis, the savings growth rate weakened. Savings rate has improved in the last 18 months including that of households with positive real interest rates since 2014. However, the weaker private corporate profit trend has meant that private sector saving have remained weak, argue Chetan Ahya and Upasana Chachra of Morgan Stanley.
India's investment rate saw a big jump between F2003 and F2008 led by pick-up in public and private capex weakening post the credit crisis with leveraged corporate balance sheets and declining corporate capex. While private capex remains weak, public capex has seen a pick-up in the last two years. India has traditionally run a current account deficit with investments outstripping savings and the gap being plugged by foreign capital without creating macro stability risks.
The variables that impact cyclical trends in savings & investment:
Revenue deficit: Governments management of a revenue deficit denotes a drain on current resources. Oil subsidies borne by PSU oil marketing companies is a drain on public saving.
Trade: Given India is a net importer of goods, the commodity terms of trade tend to have a significant bearing on the trade deficit. The improvement in terms of trade will in the broader context imply an increase in saving for the overall economy. On the other hand, with weak global macro environment, sluggish exports has resulted in an overall drain of savings.
On the investment side, the trend in private capex is determined by factors such as capacity utilization, corporate profitability and balance sheet strength. Given the current scenario of a slowdown in external demand and leveraged corporates, the trend in capex is expected to remain weak. On the other hand, the government can push public capex through on budget resources and off budget resources (mainly public sector enterprises). Public capex has seen an improvement as the government has increased outlays on capex through both the budget and public sector units. The push for higher public investment spending has been routed through infrastructure investment, which is expected to rise by 24% YoY in this fiscal year.
World gone backwards – Mauldin Economics If we had to describe the last 50 years of economic history in one word, globalisation would be high on the list. Now, thanks to certain technologies, that whole process is going in reverse. John Mauldin explains few such trends.
Below are the technological developments which made globalization possible:-
Low tech boxes - The idea of separating a truck’s cargo space from the wheels and chassis, then loading them onto ships led to significant reduction in shipping time and labor savings.
Jet airliner – Invention of jet planes allowed business people to travel the globe to build alliances, make growth plans and develop new products. Jet planes didn’t just fly faster, their high cruising altitude made them more fuel efficient and longer-range.
Communication satellites – They enabled broadcasters to beam live television signals across the globe. This made it possible to see globally which made it reasonable to think we could live, work, play and trade globally too.
Mutual funds – They helped to distribute the capital around the world to the most efficient multinational companies who used it to develop products for international distribution.
Going forward, technology is expected to contribute to regionalization and localization. Below are the technologies which might play a major role:-
Alternative energy sources – Fossil fuels remain the lowest cost option in US. But moving to the consumers’ location makes it expensive and inefficient. Solar energy enables us to power our homes using solar panels installed on the roof. While alternative source of energy are costlier than fossil fuels but the prices have been falling fast.
Additive manufacturing – The same equipment can make different products with a software update and minor retooling making it cost effective to produce goods in small quantities near the final buyer and reduce the need of global supply chain drastically.
Virtual airports – Advanced virtual reality and augmented reality will enable people to meet in a virtual conference room with the full sense of being physically together. This will let businesses operate efficiently without physical proximity to each other. Vast air transportation infrastructure will become less critical and will ultimately shrink.
Alaskan bananas – Today consumers can now enjoy all kinds of non-native foods, no matter where they live, by importing them. With appropriate environment indoors anything can be grown local and cheaper than importing it. LED lighting technology brings this idea closer to reality.
Technology isn’t the only factor though, much depends on central bank decision, international trade agreements, electoral politics and geopolitical factors. The globalized economy based on shipping stuff back and forth will make less and less sense as the technologies described above continue to mature. Technology is changing the foundational principles of globalization. However, we are still very early in this megatrend.
Starved for Yield & Blind to Risk As you probably know by now, “negative rate refugees” from Europe & Japan are desperate for yield and/or capital gains to achieve some kind of livable cash flow. And it’s really starting to distort global markets. So far, emerging market bonds (with average yields in the 6% to 6.5% range) are winning the yield-seekers’ beauty contest… with US stocks, bonds, and real assets in second place.
First, the dramatic easing in US financial conditions since February has kept the US dollar relatively contained, allowed capital flows to return to fragile markets, and ushered in a reflation in beaten-up currencies.
Second, high yields in both local currency and hard currency debt are finally starting to attract buyers from Europe, Asia, and even the United States.
In the event that the US dollar stays contained and short-term rates in Europe and Japan stay negative, yields on emerging market corporate and sovereign debt can continue to fall from their respective 4% and 6% range to converge with their developed market peers. That doesn’t leave much room for a risk premium in a market where risks appear to be rising on a number of fronts… meaning that the longer these trends persist the more violent the eventual reversal. For now, emerging market investors have the wind at their backs and all seems right with the world; but all that could change if the US dollar moves higher in the coming quarters. Such a move could not only disrupt commodity-intensive economies like Russia and Brazil and tighten liquidity once again in fragile markets like South Africa and Indonesia, but it could trigger the shock that has somehow faded from almost everyone’s minds: a sudden drop in China’s RMB.
Currency hedging costs are now almost entirely offsetting the yield that foreign investors receive on 10 year US Treasuries. To be clear, I still don’t think US Treasuries have lost their long-term appeal. To those who still want US dollar exposure, it’s still game on. And in a global flight to safety, they’re likely to receive a huge bid.
There is no alternative. Capital can keep coming into the US & bidding up US asset prices for a while longer, but I don’t think the US or the rest of the world can handle what likely happens next. In many ways, we’re seeing a repeat of the late 1990s except the world today is much weaker (including the US), fragile emerging markets account for a much larger share of global GDP, the global financial system has become dramatically more leveraged, and we’re fresh out of compelling growth stories.
(Ritesh Jain is the CIO of Tata Asset Management. Views expressed in this weekly column are personal in nature and do not represent those of Tata AMC or ETMarkets.com. It should not be construed as an investment advice. Any action taken by the reader or recipient on the basis of the information contained herein is reader's/recipient's responsibility alone.)
