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Currency Wars and its impact
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Currency Wars and its impact on
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Currency Wars and its impact
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Contents
2
Executive Summary
4
Evolution of emerging market currencies since 1970
5
Low exchange rates to boost economy
9
Currency war intensifies after 2014
20
Chinese Yuan devaluation
22
GCC economies stable enough to weather devaluation of yuan
27
APPENDIX
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List of Figures
3
Figure 1 Exchange Rate Regime Timeline
5
Figure 2 Declining proportion of countries with their currencies pegged (as a % of total)
6
Figure 3 Developing markets exchange rate regime
6
Figure 4 GDP (USD bn) v/s exchange rates chart
9
Figure 5 Current Account Balance (USD bn) v/s exchange rates chart
12
Figure 6 Exports (USD bn) v/s exchange rates chart
14
Figure 7 Unemployment rate v/s exchange rates chart
18
Figure 8 Kazakhstan Exports by Country
21
Figure 9 Kazakhstan Exports by Product
21
Figure 10 Currency war after 2014
22
Figure 11 Evolution of Yuan from fixed peg to floating
23
Figure 12 Total Exports (USD bn)
24
Figure 13 Total Reserves (USD tn)
24
Figure 14 Net FDI inflow (USD bn)
24
Figure 15 Total Exports (%)
26
Figure 16 China GDP growth (%)
26
Figure 17 China trade statistics
27
Figure 18 China crude oil imports (mn bpd)
27
Figure 19 GCC countries net foreign assets (USD bn) and as a percentage of gross debt
28
Figure 20 Country-wise UAE’s import share
29
Figure 21 Country-wise UAE’s export share
29
Figure 22 SAR forward point vs Yuan
30
Figure 23 TASI vs Yuan
30
Figure 24 Saudi Arabia net foreign assets (SAR bn)
30
Figure 25 Saudi trade statistics (2014)
31
Figure 26 Saudi Current Account Balance
31
Figure 27 USD/ Euro
32
Figure 28 USD/ Yen
32
Figure 29 USD/ Yuan
32
Figure 30 USD/ Russian Ruble
32
Figure 31 USD/ Kazakhstan Tenge (KZT)
32
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Executive Summary
4
•
The currency as a concept has witnessed huge transformation during the last century. During this
period, the world has faced many currency crises and currencies have evolved at every such incident.
•
Over the years, exchange rates have played a vital role in determining a country’s economic health. The
emerging markets have historically witnessed a push in their economic output after the devaluation of
their currencies. Countries, such as China, have managed their exchange rates to boost their exports.
Furthermore, exchange rates have a strong correlation with factors, such as interest rate, unemployment,
and inflation.
•
Since 1970, many countries have resorted to currency devaluation for improving their economic
condition. Indonesia devalued its currency during the financial crisis of 1997 to protect itself. Similarly,
Argentina devalued Peso in 2002 so that its exports remain competitive in comparison to other
emerging economies, such as Brazil, which had transformed its regime to floating rate during the same
period.
•
Currency wars have emerged significantly after 2014 and the magnitude of the war can be gauged from
the turn of events, ranging from the crash of the Russian ruble to devaluation of yen in October 2014
and depreciation of yuan in August 2015, followed by depreciation of Kazakhstani tenge. European
Central Bank President Mario Draghi recently announced that if required, the Eurozone could undertake
another round of quantitative easing, which would further increase volatility in the currency market.
•
For long, China had pegged yuan to the US dollar, which led the exports and foreign exchange
reserves to increase during periods of high growth. During the period of fixed peg, exports increased
exponentially to about USD 2.4tn in 2013 from USD 9.8bn in 1978. However, currently, as China is
experiencing slow growth, the government has allowed Yuan to devalue and shifted toward managed
floating rate regime. This would aid in China’s vision of making yuan a global currency by adding it to
the SDR basket.
•
As China contributes around 12% to the total world trade, the depreciation of yuan would lead to a
rise in exports from China. Conversely, exporters to China would witness a decrease in demand. China
imports more than 14% of steel globally and is the largest importer of crude oil in the world.
•
The Chinese yuan policy is expected to have a limited impact on trade between GCC and China. The
recent devaluation is too negligible to impact the oil demand, as oil prices have dropped over 50%
compared with the 4% decline in yuan in 2015. As GCC countries have sufficient assets, they can cope
with deficits without abandoning their currency pegs. Saudi Arabia and the UAE have enough foreign
assets to serve their debts. Saudi Arabia’s net foreign assets can cover its debt by over 60 times.
•
China is Saudi Arabia’s largest trade partner, accounting for 12.5% of total exports and 13.4% of total
imports. Hence, the devaluation of yuan would make imports to KSA from China cheaper, but would
impact the exports. Moreover, if the measures undertaken by the People’s Bank of China do not spur
growth in China, the impact could be severe. We expect the trade balance to be marginally affected
and current account balance as a percentage of GDP to decline, but within a sustainable level.
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Evolution of emerging market currencies since 1970
The recent move by China to devalue yuan has shifted the focus back on currency wars. The currency as
a concept has witnessed significant transformation in the last century. During this period, the world has
faced many currency crises and the currencies have evolved at every such incident. The pre-World War II era
was characterized by currency crisis, primarily due to wars. The post-World War era can be further classified
into pre-Bretton Woods phase (before 1973) and post-Bretton Woods phase (after 1973).
In the Bretton Woods phase, the member countries declared the par value for their currency, either in terms
of gold or USD. The countries had to intervene to maintain the exchange rates within the range. However,
the Bretton Woods system collapsed in 1970s, and thereafter the world suffered from various currency
crises, such as the Mexican currency crisis in 1980s and 1994 and the Asian currency crisis in 1997.
Figure 1 Evaluation of exchange rate regime
1944
Bretton Woods system
established a dollar
standard;
the dollar was fixed at
USD 35/ounce of gold
2000s
More emerging markets
shifted toward floating rate
system
1990s
Emerging markets started
converting their currencies
from pegged to floating
Pre -world war
Gold standard
currency.
Currencies were
fixed/pegged to
gold and the value
of gold held fixes
currencies
1973
Failure of Bretton
Woods system and
entry of flexible
exchange rates
2015
China devalued yuan,
bringing back currency
wars to the fore
2014 -15
Price wars started
again; China aims to
make Yuan an
international currency
1997
Asian currency crisis
brought to fore the
significant currency issues
in emerging economies
Source: IMF, AlJazira Capital Research
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Rapid shift in exchange rate regime in developing markets after Bretton Woods
After Bretton Woods agreement, most developing countries initially continued to peg their currencies.
However, from late 1970s, they began shifting toward basket pegs. Since 1980s and 1990s, more developing
economies moved toward flexible exchange rate regime. About 87% of developing economies had their
currencies pegged to some exchange rate in 1975. This number dropped significantly to below 50% by
1996.
Figure 2 Declining proportion of countries with their currencies pegged (as a % of total)
1975
87%
1996
50%
2015
22%
Source: IMF, AlJazira Capital Research
With time, the proportion of currencies pegged has dropped and economies globally are moving toward
freely moving exchange rate regime.
Figure 3 Developing markets exchange rate regime
Late 1970s
Countries started
shifting toward free
exchange rate regime
1970
Most currencies were
pegged (~87% of
developing markets)
1973
Fall of Bretton
Woods System
2005
China, the largest developing market,
abandoned its peg and moved toward
managed floating rate
1997
Asian currency crisis
brought currency concerns
to the fore
1980s - 1990s
More developing markets
shifted from pegged to free
regime (1996 share: lower
than 50%)
2015
Proportion of emerging
markets with currencies
pegged has dropped to
~22%
Post - currency crisis
Exited from pegged
regime due to the crisis
Source: IMF, AlJazira Capital Research
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However, some countries, particularly GCC, buck this trend
The trend of transforming into flexible exchange rate regime has picked up pace. However, there were
several exceptions as well to this. Around 14 countries, the CFA franc zone in sub-Saharan Africa, have
pegged their exchange rate to the French franc since 1948, with only one significant devaluation in 1994.
Some countries, such as Argentina in 1991 and Hong Kong SAR in 1983, even reverted back to fixed rate
system. However, by late 1990s, the flexible rate regimes dominated most regions globally. Argentina
abandoned its fixed rate regime after the 2001 crisis. GCC countries, except Kuwait, have not followed this
trend and their currencies are pegged to date.
Table 1: List of countries with pegged currencies
Country
Region
Bahrain
Currency (ccy) name
Peg rate
Peg ccy
Rate since
Middle East
Dollar
0.3760
USD
2001
Benin
Africa
West African CFA Franc
655.9570
EUR
1999
Bosnia and Herzegovina
Europe
Convertible Mark
1.9558
EUR
2002
Bulgaria
Europe
Lev
1.9558
EUR
2002
Burkina Faso
Africa
655.9570
EUR
1999
655.9570
EUR
1999
655.9570
EUR
1999
Chad
Africa
Cuba
Central America
West African CFA Franc
Central African CFA
Franc
Central African CFA
Franc
Central African CFA
Franc
Convertible Peso
Denmark
Europe
Krone
Djibouti
Africa
Cameroon
Africa
Central African Republic
Africa
655.9570
EUR
1999
1.0000
USD
2011
7.4604
EUR
1999
177.7210
USD
1973
655.9570
EUR
1999
15.0000
USD
2005
655.9570
EUR
1999
655.9570
EUR
1999
USD
1998
Gabon
Africa
Guinea-Bissau
Africa
Franc
Central African CFA
Franc
Nakfa
Central African CFA
Franc
West African CFA Franc
Asia
Dollar
7.75-7.85
Equatorial Guinea
Africa
Eritrea
Africa
Hong Kong
Ivory Coast
Africa
West African CFA Franc
655.9570
EUR
1999
Jordan
Middle East
Dinar
0.7090
USD
1995
Lebanon
Middle East
Pound
1507.5000
USD
1997
Lesotho
Africa
Loti
1.0000
ZAR
1980
Mali
Africa
West African CFA Franc
655.9570
EUR
1999
Namibia
Africa
Dollar
1.0000
ZAR
1993
Nepal
Asia
Rupee
1.6000
INR
1993
Niger
Africa
West African CFA Franc
655.9570
EUR
1999
Oman
Middle East
Rial
0.3845
USD
1986
Central America
Balboa
1.0000
USD
1904
Middle East
3.6400
USD
2001
655.9570
EUR
1999
Middle East
Riyal
Central African CFA
Franc
Riyal
3.7500
USD
1986
Senegal
Africa
West African CFA Franc
655.9570
EUR
1999
Swaziland
Africa
Lilangeni
1.0000
ZAR
1974
Togo
Africa
West African CFA Franc
655.9570
EUR
1999
UAE
Middle East
Dirham
3.6725
USD
1997
South America
Bolivar
6.3000
USD
Panama
Qatar
Congo
Saudi Arabia
Venezuela
Africa
2013
Source: Investment Frontier
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Shift toward floating rate regime by emerging economies
Most economies had their currencies pegged for the majority of the part post-World War II era. However,
emerging market currencies have been progressively transforming from fixed to freely traded currencies
since the late 1990s. There are still few countries that manage currency movements and few, such as GCC
countries, have their currencies pegged to USD. The loosening of currency control and credible monetary
policy has resulted in many emerging countries resisting global shocks and avoiding crisis.
Instances of changing currency systems of emerging economies
Brazil
Brazil was able to keep its currency pegged and inflation under control during the early 1990s due to huge liquidity in the global
market. However, overvalued currency, coupled with external shocks and recession, during 1998–2002 led to the collapse of
Brazil’s exchange rate regime in 1999. The Brazilian central bank, which kept its currency under tight control until then was
forced to abandon the control and move toward floating exchange rate system.
Russia
Russian ruble has also shown gradual movement toward flexible exchange rate system. The Russian default in 1998 crumbled
the domestic as well as international markets. The fixed exchange rate regime and fragile fiscal position of Russia became
unsustainable due to spillover effects of global financial distress. Russian government then announced significant devaluation
of ruble in August 1998. Eventually, Russia abandoned the currency corridor and adopted freely floating exchange regime in
September 1998. The government revamped the restrictive capital regulations in 2004 and 2009 onward the Bank of Russia
has largely reduced its intervention in the market. The Bank intends to transition ruble into a completely floating rate regime.
In 2014, Bank of Russia moved ahead with fully floating the Ruble. The central bank removed the dual-currency trading band
methodology to calculate the nominal exchange rate and abandoned the policy of daily foreign exchange interventions by the
Central Bank to stabilize its currency. The move was prompted by the largest weekly drop in ruble in 11 years during November
2014.
China
Chinese exchange rate policy has witnessed significant changes since the crash of Bretton Woods system in 1973. Chinese
renminbi was pegged to USD for majority of the time. However, to boost exports, China allowed its currency to devalue in
1980s and 1990s and finally lifted the peg in 2005. The currency is now under tightly managed floating regime. The exchange
rate is maintained within tight, but relaxing bands against USD. The bands increased from initial ±0.3% to ±2% in 2014 and to
±3% as recently as July 2015. Dwindling exports has led the country to loosen its strings and allow the currency to depreciate.
China has always been blamed by global economies for manipulating its currency. The People’s Bank of China (PBoC) pledged
to allow the market a greater role in determining the exchange rate, but this will be a long process.
India
India’s exchange rate regime has evolved significantly during the reform period after 1990. From a nominal fix rate regime to
one-way movement in 1990s to two-way with low volatility (a tightly managed exchange rate) to nominal movement and
greater volatility after the global crisis in 2007–08.
Saudi Arabia
The Saudi riyal has been pegged to USD at SAR 3.745 per USD since 1986. The exchange rate was determined by the Saudi
Arabian Monetary Agency (SAMA). SAMA and Ministry of Finance administer the foreign exchange rates. SAMA has maintained
its stance of limited intervention in the market to control the exchange rate. The SAMA intervened in the foreign exchange
market last in 1998.
Poland
Similar to many economies that transitioned from centralized administrative model to market economy during the 1990s,
Poland also witnessed a significant inflation during the phase. The inflation in Poland peaked to over 500% in 1990. To control
the inflation, Poland shifted to a fixed exchange rate regime, with the currency pegged to USD. However, the fixed rate system
was not able to solve the issue. Hence, in 1991, the government devalued the zloty (Poland currency) and switched to crawling
peg. However, the new regime was still not flexible and led to devaluation of the currency. Hence, in 1995, the country moved
into a crawling band regime. Thereafter, Poland kept increasing the band and eventually shifted to floating rate system in 2001.
Kuwait
Kuwait is the only country in GCC that has not pegged its currency (KWD) to USD. In 2007, Kuwait abandoned the dollar peg it
had adopted in 2003 to switch to the previous basket peg system. During 1975–2003, KWD was pegged to a weighted currency
basket. The rising inflation levels due to depreciation of USD against other currencies prompted the government to shift its
stance. Currently, KWD is the world’s most valuable currency.
8
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Low exchange rates to boost economy
Over the years, exchange rates have played a vital role in determining a country’s economic health.
Beneficial exchange rates help to boost the level of trade of the country along with other economic factors.
The exchange rate regime and the rate of exchange impact various economical and financial factors of a
country, such as exports, trade balance, and current account balance.
We analyzed the trends of historical exchange rate regimes of 1 emerging market economies with the
following parameters:
• GDP
• Inflation
• Current Account Balance
• Exports
• Unemployment Rate
GDP recovery following low exchange rate period
The emerging markets have historically witnessed a push in their economic output after the devaluation in
their currencies. The push was primarily driven by rising exports due to lower exchange rates.
Figure 4 GDP (USD bn) v/s exchange rates
South Africa
GDP cycle of rise and
fall corresponding to
exchange rate
during 2000-04
14
11.2
9
360
270
5.6
180
2.8
90
0
0
Jan-80
Jan-81
Jan-82
Jan-83
Jan-84
Jan-85
Jan-86
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
8.4
South African Rand (USD)
1
450
Argentina, Brazil, China, Mexico, Russia, Saudi Arabia and South Africa
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GDP (USD bn) (RHS)
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Saudi Arabia
800
4.0
3.9
600
3.8
3.6
Devaluation of Riyal from 1983-1986
leading to lower GDP. Later, pegging
Riyal exchange rate lead to GDP
growth.
3.5
3.4
3.3
400
200
3.1
0
Jan-80
Jan-81
Jan-82
Jan-83
Jan-84
Jan-85
Jan-86
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
3.0
Saudi Riyal(USD)
GDP (USD bn) (RHS)
Falling GDP due to
sanctions prompting
devaluation of currency
Russia
Currency devaluation in
1999-00 followed by
recovery in GDP in
2001
80
64
48
2,500
2,000
1,500
32
1,000
16
500
Russian Ruble(USD)
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
0
0
GDP (USD bn) (RHS)
Mexico
Growing GDP during
18
14
11
7
2007-09; falling rates
1,120
Period of rising GDP
and falling exchange
840
rates
560
280
0
0
Jan-80
Jan-81
Jan-82
Jan-83
Jan-84
Jan-85
Jan-86
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
4
Mexican Peso(USD)
10
1,400
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GDP (USD bn) (RHS)
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China
Currency
devaluation by
10.0
12,000
China after 1990
to fuel growth
7.5
9,000
Increasing GDP
from 2006 to
5.0
6,000
2015 due to low
exchange rates
2.5
3,000
0.0
Jan-80
Jan-81
Jan-82
Jan-83
Jan-84
Jan-85
Jan-86
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
0
Chinese Yuan(USD)
8
GDP growth
corresponding to falling
rates
Argentina
Rising GDP from
2004-09 after currency
devaluation in 2002
(Crisis)
10
GDP (USD bn) (RHS)
720
600
480
6
360
4
240
-15
-14
Jan
-13
Jan
-12
Jan
-11
Jan
-10
Jan
-09
Jan
-08
Jan
-07
Jan
-06
Jan
-05
Jan
-04
Jan
-03
Argentine Peso(USD)
Jan
-02
Jan
-01
Jan
-00
Jan
-99
Jan
-98
Jan
-97
Jan
-96
Jan
-95
Jan
Jan
Jan
Jan
Jan
Jan
-94
0
-93
0
-92
120
-91
2
GDP (USD bn) (RHS)
Source: IMF, Oanda, World Bank, AlJazira Capital Research
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Low exchange rate boosts current account balances
Currency devaluation renders the goods of a country cheaper for the importing countries. Hence, the country’s
competitiveness in exports increases, leading to higher exports. On the other hand, imported goods become
costly for the country and the value of goods imported reduces. Hence, depreciation in the exchange rate
generally improves the current account of an economy and appreciation worsens the balance.
Figure 5 Current account balance (USD bn) v/s exchange rates
South Africa
14
0
11
-5
8
-10
6
-15
Huge Current Account
Deficit during 2012-14
leading to currency
devaluation
3
0
Jan-05
-20
-25
Jan-06
Jan-07
Jan-08
Jan-09
South African Rand(USD)
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Current Account Balance (USD bn) (RHS)
Saudi Arabia
3.78
180
Saudi Arabia has maintained its peg within limits
without any impact on Current Account
3.76
144
3.74
108
3.72
72
3.7
36
3.68
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Saudi Riyal(USD)
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
0
Current Account Balance (USD bn) (RHS)
Russia
90
75
100
60
80
45
60
30
40
15
20
0
12
120
Russia saw inverse relation in 2014
due to rise in exports
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Russian Ruble(USD)
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Jan-10
Jan-11
Jan-12
Jan-13
Current Account Balance (USD bn) (RHS)
Jan-14
Jan-15
0
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Mexico
21
0
18
-5
15
-10
12
-15
Rising deficit in 2009
leading to currency
devaluation
9
6
-20
-25
-30
3
-35
0
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Mexican Peso(USD)
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Current Account Balance (USD bn) (RHS)
India
70
0
56
-20
42
-40
28
14
0
-60
Currency devaluation
during 2010-13 due to
rising deficits
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Indian Rupee(USD)
-80
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
-100
Current Account Balance (USD bn) (RHS)
China
450
8.4
Rising surpluses
corresponding to currency
appreciation during
2006-09
7.8
360
270
7.2
180
6.6
90
0
6.0
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Chinese Yuan(USD)
13
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Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Current Account Balance (USD bn) (RHS)
Jan-15
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Brazil
4.2
20
3.6
0
3
-20
2.4
-40
1.8
-60
Rising deficits corresponding to
currency appreciation during
2012-14
1.2
0.6
0
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Brazilian Real(USD)
Jan-10
-80
-100
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
-120
Current Account Balance (USD bn) (RHS)
Source: IMF, Oanda, World Bank, AlJazira Capital Research
Countries using exchange rates to boost exports
Historically, countries, such as China, have managed their exchange rates to boost exports. The low exchange
rate maintained by China significantly boosted its exports over the years and made it the largest exporter
globally. Various other emerging markets have benefited from low exchange rates and suffered during
periods of high exchange rates.
Figure 6 Exports (USD bn) v/s exchange rates
South Africa
140
14
12
Currency devaluation in
2005-09 leading to higher
exports
10
8
100
80
60
4
40
2
20
0
0
Jan-71
Jan-72
Jan-73
Jan-74
Jan-75
Jan-76
Jan-77
Jan-78
Jan-79
Jan-80
Jan-81
Jan-82
Jan-83
Jan-84
Jan-85
Jan-86
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
6
South African Rand (USD)
14
120
© All rights reserved
Exports of Goods and Services (USD bn) (RHS)
20
15
0
15
© All rights reserved
Russian Ruble(USD)
Mexican Peso(USD)
Exports of Goods and Services (USD bn) (RHS)
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Saudi Riyal(USD)
Jan-03
Jan-02
80
Jan-01
Jan-71
Jan-72
Jan-73
Jan-74
Jan-75
Jan-76
Jan-77
Jan-78
Jan-79
Jan-80
Jan-81
Jan-82
Jan-83
Jan-84
Jan-85
Jan-86
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
5
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
0
Jan-71
Jan-72
Jan-73
Jan-74
Jan-75
Jan-76
Jan-77
Jan-78
Jan-79
Jan-80
Jan-81
Jan-82
Jan-83
Jan-84
Jan-85
Jan-86
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
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Saudi Arabia
Saudi Arabia has maintained its peg within limits with
exports primarily driven by oil
450
4
360
3
270
2
180
1
90
0
0
Exports of Goods and Services (USD bn) (RHS)
Russia
Maintained low exchange rates to drive
exports
800
60
600
40
400
20
200
Currency devaluation in
1988-2001 leading to
higher exports
5
0
Exports of Goods and Services (USD bn) (RHS)
Mexico
500
400
10
300
200
100
0
Jan-71
Jan-72
Jan-73
Jan-74
Jan-75
Jan-76
Jan-77
Jan-78
Jan-79
Jan-80
Jan-81
Jan-82
Jan-83
Jan-84
Jan-85
Jan-86
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
0
16
Jan-71
Jan-72
Jan-73
Jan-74
Jan-75
Jan-76
Jan-77
Jan-78
Jan-79
Jan-80
Jan-81
Jan-82
Jan-83
Jan-84
Jan-85
Jan-86
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-71
Jan-72
Jan-73
Jan-74
Jan-75
Jan-76
Jan-77
Jan-78
Jan-79
Jan-80
Jan-81
Jan-82
Jan-83
Jan-84
Jan-85
Jan-86
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
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Kuwait
0.40
The exports are primarily driven by oil prices
Kuwaiti Dinar(USD)
56
42
Indian Rupee(USD)
10
8
© All rights reserved
China has maintained
low exchange rates
to drive exports
Chinese Yuan(USD)
Exports of Goods and Services (USD bn) (RHS)
140
0.35
112
0.30
84
0.25
56
0.20
28
0.15
0
Exports of Goods and Services (USD bn) (RHS)
India
70
500
Low exchange
rates driving
exports
400
300
28
200
14
100
0
Exports of Goods and Services (USD bn) (RHS)
China
2,500
2,000
6
1,500
4
1,000
2
500
0
0
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Argentina
10
120
Pickup in exports
after currency
devaluation in 2002
8
96
-15
-14
Jan
-13
Jan
-12
Jan
-11
Jan
-10
Jan
-09
Jan
-08
Jan
-07
Jan
-06
Jan
-05
Jan
-04
Jan
-03
Jan
-02
Jan
-01
Argentine Peso(USD)
Jan
-00
Jan
-99
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
-98
0
-97
0
-96
24
-95
2
-94
48
-93
4
-92
72
-91
6
Exports of Goods and Services (USD bn) (RHS)
Source: IMF, Oanda, World Bank, AlJazira Capital Research
17
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Exchange rate regime indirectly impacts employment levels
Emerging markets, particularly Asia, face significant unemployment problems. In such scenarios, countries
also resort to exchange rates regime. During high unemployment periods, devaluation of currency to
boost exports and production increases demand for labor. Furthermore, high unemployment contributes
to lower productivity and exports, as well as higher trade deficit; thus, forming pressures on currency
exchange rate in the future.
Figure 7 Unemployment rate v/s exchange rates
UAE
3.68
5%
UAE has maintained its peg within limits
without affecting unemployment
3.68
4%
UAE Dirham(USD)
-13
-12
Jan
Jan
-11
-10
Jan
Jan
-09
-08
Jan
-07
Jan
-06
Jan
-05
Jan
Jan
-04
-03
Unemployment Rates (RHS)
South Africa
Increasing unemployment rate
indirectly leading to fall in
exchange rate
14
Jan
-02
Jan
-01
Jan
-00
Jan
-99
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
-98
0%
-97
3.67
-96
1%
-95
3.67
-94
2%
-93
3.67
-92
3%
-91
3.68
30%
-13
-12
Jan
-11
Jan
Jan
-10
-09
Jan
-08
Jan
-07
Jan
-06
Jan
-05
Jan
-04
Jan
-03
South African Rand(USD)
Jan
Jan
-02
-01
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
-00
0%
-99
0
-98
6%
-97
2.8
-96
12%
-95
5.6
-94
18%
-93
8.4
-92
24%
-91
11.2
Unemployment Rates (RHS)
Saudi Arabia
Saudi Arabia maintained its peg without affecting unemployment
3.77
© All rights reserved
3
n1
2
Ja
n1
1
Ja
Ja
n1
0
n1
9
Unemployment Rates (RHS)
Ja
n0
8
Ja
n0
7
Ja
n0
6
Ja
Ja
n0
5
n0
4
Ja
n0
3
n0
Ja
Ja
n0
n0
Ja
Ja
n0
n9
Ja
n9
Ja
Ja
n9
n9
Ja
Ja
n9
n9
Ja
n9
Ja
Ja
n9
Ja
n9
Saudi Riyal(USD)
2
0%
1
3.7
0
1%
9
3.71
8
2%
7
3.72
6
3%
5
4%
3.73
4
3.74
3
5%
2
3.75
1
6%
Ja
18
7%
3.76
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Russia
Rising unemployment rate indirectly
leading to fall in exchange rate
42
14%
Russian Ruble(USD)
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
0%
Jan-06
0
Jan-05
2%
Jan-04
6
Jan-03
4%
Jan-02
6%
12
Jan-01
18
Jan-00
8%
Jan-99
24
Jan-98
10%
Jan-97
30
Jan-96
12%
Jan-95
36
Unemployment Rates (RHS)
Mexico
Rising unemployment rate indirectly
leading to fall in exchange rate
16
8%
13
n-
Ja
12
n-
Ja
11
10
n-
n-
Ja
09
n-
Ja
08
Ja
nJa
07
n-
Ja
06
05
nJa
04
n-
n-
Ja
03
Ja
nJa
02
n-
Ja
01
00
nJa
99
n-
n-
Ja
n-
Ja
Ja
nJa
nJa
nJa
n-
n-
Ja
Ja
nJa
nJa
98
0%
97
-4
96
2%
95
1
94
4%
93
6
92
6%
91
11
Unemployment Rates (RHS)
Mexican Peso(USD)
Argentina
Falling
unemployment
rate and stable
exchange rates
after crisis in
2002
8
6
20%
15%
Argentine Peso(USD)
3
2
n1
Ja
n1
1
Ja
Ja
n1
0
9
Ja
n1
8
n0
Ja
n0
7
Ja
n0
6
Ja
Ja
n0
5
4
Ja
n0
3
n0
Ja
n0
2
Ja
n0
1
Ja
Ja
n0
0
9
Ja
n0
8
n9
Ja
n9
7
Ja
n9
Ja
n9
Ja
n9
Ja
n9
Ja
n9
Ja
n9
n9
Ja
Ja
6
0%
5
0
4
5%
3
2
2
10%
1
4
Unemployment Rates (RHS)
Source: IMF, Oanda, World Bank, AlJazira Capital Research
19
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Currency war intensifies after 2014
Currency war made a comeback from the beginning of 2014. The magnitude of the war can be understood
from the turn of events, ranging from the crash of the Russian ruble to devaluation of yen in October 2014
and depreciation of yuan in August 2015, followed by depreciation of the Kazakhstani tenge. Recently,
European Central Bank President Mario Draghi announced that if required, the Eurozone could take up
another round of quantitative easing. This would further increase the volatility in the currency market.
Competitive devaluation, a tool for economic recovery
USD appreciated against most major currencies in the past year, led by slow growth in most countries.
To increase growth, encourage exports, and discourage imports, the governments of various countries
have resorted to currency devaluation. The problem is cyclicality of currency devaluation, as one country
devalues its currency, another country follows suit to protect itself and the vicious spiral begins causing a
race to the bottom. This phenomenon thus leads to a currency war.
Quantitative easing in Japan impacts neighboring countries, particularly China
In October 2014, the Bank of Japan announced another round of quantitative easing, indicating its strategy
of ‘beggar-thy-neighbor’. Yen depreciated by 10.7% from 108.0 per USD in October 2014 to 119.5 per USD in
December 2014. This move impacted China adversely, as it became defenseless when faced with currency
war due to yuan’s slow crawling rate against USD. This worsened the situation for China, as the economy
was already struggling from slow growth of around 7% (compared with the prior-period growth rate of
around 10%). This was one of the reasons China devalued yuan to boost economic growth.
Russian ruble, a race to the bottom
Many sanctions were imposed on Russia following its conflict with Ukraine. This, coupled with lower oil
prices, led to a decline in the value of Russian ruble, as petroleum products constitute around 63% of
Russia’s total exports. Ruble declined from 34.4 per USD in June 2014 to around 64.6 per USD in February
2015. Russia also moved toward floating rate regime during this period. However, as most of Russia’s oil
exports are contracted in USD, in short term, this would cushion the losses due to weakening oil prices.
The dragon enters the war
The Chinese economy is weakening in the short term, fueled by declining exports, with exports declining
YoY for the last four months. China’s GDP is expected to grow at 6.8% and 6.3% in 2015 and 2016, respectively,
lower than its earlier growth rates. Owing to these factors, China allowed Yuan to depreciate 4% against
USD.
20
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Kazakhstan follows suit
Kazakhstan is among Asia’s largest crude exporters, with crude petroleum constituting 55.0% of its total
exports. Russian ruble depreciated from 34.6 per USD in June 2014 to 65.2 per USD in August 2015.
Furthermore, yuan also depreciated about 3% in August 2015. China and Russia together account for
around 29% of Kazakhstan’s total exports. This led to the goods from the country to be less competitive in
the respective markets.
Figure 9 Kazakhstan exports by product
Figure 8 Kazakhstan exports by country
Oth ers
% 37
C h i na %
20
Oth ers
% 37
R us s i a %
T urk ey %
I taly %
4
Sw i tz erland
% 4
Aus tri a
% 4
France
% 7
Neth erland
9
9
%
C h i na %
7
Source: The Observatory of Economic Complexity, AlJazira Capital Research
20
R us s i a %
T urk ey %
I taly %
4
Sw i tz erland
% 4
Aus tri a
% 4
France
% 7
Neth erland
9
%
9
7
Source: The Observatory of Economic Complexity, AlJazira Capital Research
As the country’s currency is pegged to USD, an anticipation of increase in interest rates in the US led to the
appreciation of USD. This increased pressure on the country’s currency peg.
Similar to the Argentine crisis, Kazakhstan had to resort to other measures to remain competitive. Therefore,
the country resorted to currency devaluation from around 180 Kazakhstani tenge (KZT) per USD to 240 KZT
per USD in August 2015.
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Figure 10 Currency war after 2014
August 2015 – Chinese
yuan devaluation
Suffering from low exports
and slow growth, China
allowed yu an to depreciate
around 3% against USD
June 2014 – Russian ruble
devaluation
Ru ssian ruble began falling
and lost almost half its value
until February 2015, due to
weak oil prices and sanctions
on the country due to the
Ukraine fiasco
October 2014 – Japanese
yen devaluation
The Bank of Japan
announced another round of
quantitative easing to
simulate growth in the
economy
September 2015 –
Possible currency war
due to another round
of QE
ECB announced it may
undergo another round of
QE if required to simulate
growth and avert
deflation
August 2015 – Kazakhstani
tenge devaluation
As the country’s major exports
were becoming uncompetitive,
Kazakhstan devalued tenge by
almost 30%
Source: AlJazira Capital Research
The path ahead
Currency devaluation leads to a decline in purchasing power domestically and increases inflation.
However, the devaluation provides an immediate boost to the economy’s exports and helps in increasing
employment, in addition to reducing trade deficit. This is the primary reason for many countries to use the
mechanism during economic crisis. Therefore, we believe, more countries could devalue their currencies as
they feel the heat of currency wars from peers globally.
Chinese Yuan devaluation
China’s journey to a global powerhouse
China began its transition to a global powerhouse in 1978, when the country commenced undertaking
economic reforms by opening trade with the outside world. China established yuan as its foreign trade
currency and renminbi as its domestic currency. The country set up two different prices for state-owned
enterprises (SOEs) and private sector goods, with the SOEs receiving lower price advantage.
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In 1980, China became a member of the IMF and the World Bank. The government created four special
economic zones in Zhuhai, Xiamen, Shenzhen, and Shantou for encouraging foreign direct investment
(FDI). Furthermore, the Chinese government promoted 14 coastal cities and three regions as open areas
for foreign investment. These regions enjoy less red tape and tax benefits to attract FDI. In 1986, the
government passed General Principles of Civil Law to provide the basic legal principles for operating a
market economy. In 1987, the Chinese government recognized private sector as an important factor for
economic growth.
China slowly began reforming the yuan from 1988. After initially pegging the yuan to USD, China gradually
moved toward the managed floating rate regime. The historical timeline presents detailed reforms path for
the yuan.
Figure 11 Evolution of Yuan from fixed peg to floating
1996
Allowed yuan
to be fully
convertible
under the
current
account
1988
Semi-official
currency swap
centers
established
across China to
allow firms to
trade yuan
1994
Unif ied dual
exchange
rates;
devalue yuan
by 33.0% to
8.7 against
USD
2003
Huge trade surplus
led to international
pressure toallow
the yua n ri s e for
balancing global
trade
2000
Widened the band
to 8.2760 –8.2800
against USD
1997-99
Yuan boxed
between
8.2770 and
8.2800 for
about three
years
2001
Joined WTO and
pledged to
gradually adjust its
currency regime
2008
Effectively peg ged
yuan to 6.83
against USD
2005
Revalued yuan by
2.1% and shifted to
managed floating
exchange rate
based on reference
to a basket of
currencies
2004
Announce d
gradual
move ment
toward flexible
currency regime
2015
Devalued yuan by about
3% against USD
2010
Resumed reforms
for yuan exchange
rate and increasing
currency flexibility
2009
Began
internationalization
of yuan
2007
Widened yuan’s
daily trading
band against USD
to 0.5% from
0.3%
2012
Allowed all firms in
China to pay for
imports and exports
in yuan and
increase the trading
band for theyuan
against USD to
1.0% from 0.5%
Source: AlJazira Capital Research
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Yuan pegged to USD aids in soaring of exports
For long, China pegged its currency at a fixed rate, thereby protecting its exporters and encouraging
exports. During the period of fixed peg, exports increased exponentially to about USD 2.4tn in 2013 from
USD 9.8bn in 1978. Since there are restrictions on the amount of foreign exchange that can be held by a
private entity, the foreign exchange reserves soared to USD 3.9tn in 2014 from USD 4.5bn in 1978. China
ranks first in the world in terms of foreign exchange reserves, way ahead of developed and developing
countries, such as the US (USD 434.4bn), Japan (USD 1,260.0bn), India (USD 325.1bn), and Germany (USD
193.5bn). China has been gradually liberalizing its policies toward floating exchange rate regime (price
determined by market forces).
Figure 13 Total reserves (USD tn)
Figure 12 Total exports (USD bn)
4
2013
C h i na
G erm any
I nd i a
Japan
Source: National Bureau of Statistic of China, AlJazira Capital Research
2011
2005
2002
1999
France
U ni ted
2014
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1985
1978
1978
500
1996
0
1993
1,000
Japan
bi a
Saud i Ara
1990
1
1987
1,500
1984
2
1981
2,000
0
C h i na
3
2,500
2008
3,000
Saud i Arabi a
States
Source: World Bank, AlJazira Capital Research
The FDI inflows in China have been increasing rapidly after the government began undertaking measures
to attract foreign investment in 1980. In 2013, China attracted one of the highest FDI net flows globally,
totaling 15.8% of the total global FDI net flow.
Figure 14 Net FDI inflow (USD bn)
350
300
250
200
150
100
B raz i l
C h i na
G erm any
I nd i a
R us s i an Fed erati on
U ni ted States
2013
2012
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1983
1984
1982
1981
1980
1979
50-
1978
0
2011
50
U ni ted K i ngd om
Source: World Bank , AlJazira Capital Research
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Internationalization − What’s in it for China?
China is reforming the yuan in line with its vision to make yuan a global currency by adding it to the SDR
basket. This would help China in the following ways:
• Reserve currency status would lower the borrowing costs for Chinese companies, in addition to providing
more favorable terms and facilitating overseas expansion.
• Cross-border contracts in major commodities, such as iron ore, would be priced in yuan, thereby averting
foreign exchange risks.
• China would be able to use its significant foreign exchange reserves for more economically productive
purposes, stimulating economic growth (currently, other reserve currency countries, with much lower reserves
relative to their GDP, such as the US, can operate effectively without large reserves).
How would internalization of yuan impact the world?
To diversify foreign exchange holding, countries consider euro as a key candidate. However, due to
uncertainties caused by the Eurozone debt crisis, countries are seeking non-traditional currencies for
foreign exchange reserves. Many central banks and global investors are increasingly considering yuan as
an alternative.
The global impact of internalization of yuan can be summarized as follows:
• This would increase demand for yuan by central banks globally and they will be exposed to yuan overnight.
• China accounted for around 12.0% of global GDP and 12.0% of global trade, yet the yuan is only used for
around 2.0% of global payments. The demand for yuan is expected to increase after being declared a reserve
currency.
• This increased demand will lead to appreciation of yuan, thereby taking away the competitive export edge
away from China. The above turn of events would make imports from China more costly and impact industries
(importing low cost goods) globally.
• Currently, China settles nearly 22% of its foreign trade in yuan, up from 1% in 2010. However, yuan’s share in
global gross foreign exchange market turnover is 2.2% compared with 87.0% for USD, 33.4% for euro, and 23.0%
for yen (total volume adds to 200%, as each transaction involves two currencies). Thus, we expect yuan’s use in
global trade to increase after the inclusion in the reserve currency.
China allowed the yuan to depreciate 3.0% against USD on August 11, 2015. This is mainly because China
allowed market forces to determine the price of yuan. Although this step was undertaken basically for
protecting China’s own interest, this would help the country fulfill the pre-condition for becoming a world
reserve currency.
Why did China allow Yuan to depreciate?
Depreciation would serve dual purpose for China in the short term; it will help boost economic growth and
fulfill the pre-condition for being a world reserve currency.
USD appreciated anticipating the US interest rate hike over the past year. Yuan being pegged to USD
was also dragged higher, rendering it less competitive. This has hit Chinese exports severely. As the US
Federal Reserve is close to increasing its interest rate (the first time in seven years), which indicates further
appreciation of USD, the situation could worsen for China.
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Figure 16 China GDP growth (%)
Figure 15 Total Exports (%)
0. 6
16. 0
% 48
0. 5
14. 0
12. 0
0. 4
10. 0
0. 3
8. 0
% 3- % 3-
% 8-
Source: National Bureau of Statistic of China, AlJazira Capital Research
2016E
2015E
2014
Jul15-
0. 0
Jun15-
May15-
Apr15-
Mar15-
Feb15-
Jan15-
Dec14-
Nov14-
Oct14-
Sep14-
Aug14-
Jul14-
4. 0
2. 0
0. 10. 2-
6. 0
2013
0. 0
% 6-
2012
% 15-
2011
% 3
2010
% 5
% 10
2009
% 12
2008
% 15
2007
0. 1
% 9
2006
% 15
2005
0. 2
Source: IMF, World Bank, AlJazira Capital Research
The economy is weakening in the short term, fueled by declining exports. China is expected to grow at 6.8%
and 6.3% in 2015 and 2016, respectively, lower than its earlier growth rates of about 8–10%. On YoY basis,
Chinese exports have declined in the last four months. As the economy is weakening, the central bank did
not have to interfere to depreciate the yuan; it can allow the market forces to pull down the currency.
Devaluation would render Chinese goods cheaper in the market and encourage exports and discourage
local imports, resulting in improved balance of payments. In addition, the People’s Bank of China (PBoC)
lowered interest rates by 25 basis points to 4.6%, its fifth interest rate cut since November 2014, to encourage
industrial growth. Furthermore, PBoC lowered reserve ratio by 50 basis points for all banks (the fourth cut
since February 2015). These measures would help China meet its GDP growth target of 7.0% in 2015.
The currency devaluation can be considered an incremental step toward making the currency float freely in
the market, a pre-condition for becoming a world reserve currency. The latest changes indicate that PBoC
would no longer set the value of the yuan; market forces would determine the value by referring its closing
rate on the last day.
Global market tumble due to depreciation of yuan
As China contributes around 12% to the total world trade, the depreciation of yuan would increase China’s
exports. On the other hand, exporters to China would witness a decrease in demand. China imports more
than 14% of steel globally and is the largest importer of crude oil globally; therefore, these imports could
be impacted.
As China depreciated its currency, almost all major stock markets across the globe reacted impulsively and
were seen in the red. This was mainly ascribed to some factors listed below:
• Chinese oil imports are one of the factors keeping oil prices from falling further. A weaker yuan would lead to
lower demand for oil; Prices of commodities may also tumble.
• Countries, such as Australia, which experienced an economic boom recently by exporting natural resources,
such as iron ore and petroleum, to China (29% of Australia’s exports) will witness a significant slowdown.
• Nations from which China imports, such as Japan (10% of China’s total imports), South Korea (9.3%), Other
Asia (8.1%), the US (8.0%), and Germany (6.0%), would witness lower demand from the Chinese markets.
• Of China’s imports, 14% constitute crude oil. Therefore, we expect a decline in the revenues of oil-exporting
countries.
26
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GCC economies stable enough to weather devaluation of yuan
The Chinese yuan policy is expected to have limited impact on trade between GCC countries and China.
The recent devaluation is too negligible to impact the oil market and demand for a change in strategy. The
Brent prices have dropped over 50% since 2014. Hence, a depreciation of small magnitude in yuan would
not majorly impact imports from GCC countries. The Chinese government plans to seize the opportunity of
low oil prices by building strategic reserves. China accumulated a surplus of about 41mn barrels in the first
five months of 2015 by importing more than required oil for its refineries. We expect demand to be stable
in the near future; however, the market of refined products may witness increased competition, as demand
for refined products from China may drop.
Figure 18 China crude oil imports (mn bpd)
Figure 17 China trade statistics
8
250
7. 5
7
150
6. 5
100
6
5. 5
50
Source: Chinese Government stats, AlJazira Capital Research
Jul15-
Jun15-
Apr15-
May15-
Mar15-
Feb15-
Jan15-
Dec14-
Oct14-
Nov14-
Sep14-
p o r t s
4
Aug14-
Jul15-
Jun15-
Apr15-
May15-
Mar15-
Feb15-
Jan15-
Im
4. 5
Jul14-
E x p o r t s
Dec14-
Nov14-
Oct14-
Sep14-
5
Jul14-
0
Aug14-
USD b n
200
Source: Media research, AlJazira Capital Research
Despite the fall in overall imports by China in the last year, oil imports rose to its highest level (7.4mn bpd)
in July 2015. China also overtook the US in terms of the volume of crude exports in April 2015. Hence, the
GCC countries have not yet bore the brunt of devaluation of yuan.
Trade balance to improve marginally
As discussed, oil imports from China, which eclipse all other products exported by GCC countries to China,
are holding up. On the other hand, GCC countries import considerable amount of non-oil goods from China.
Therefore, depreciation of yuan and strengthening of USD would render imports cheaper and improve
trade balance in favor of GCC.
China’s diversification of oil import destinations had low impact on GCC
China has begun diversifying its oil importing sources since early 2014. Imports from GCC, dominated
by fuel, accounted for 39.5% of Chinese fuel imports during the first five months of 2014. The share has
dropped by 391 bps since the beginning of 2014. The overall imports declined by even higher margins.
Hence, the impact of Chinese trade factors on the GCC countries is also reducing, although marginally.
27
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Currency Wars and its impact
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Large assets of GCC countries to peg off currency risk
Saudi Arabia and the UAE have sufficient assets to allow them to cope with deficits without abandoning
their currency pegs. These countries have enough foreign assets to serve their debt. KSA’s net foreign assets
can cover its debt by over 60 times. Kuwait and Qatar are even better placed, led by stronger fiscal positions.
Hence, Kuwait and Qatar face the least risk from devaluation of yuan. On the other hand, Bahrain faces the
highest risk among the GCC countries.
Figure 19 GCC countries net foreign assets (USD bn) and as a percentage of gross debt (as of August)
6036%
712. 9
42%
6. 1
B ah rai n
451%
51. 7
K uw ai t
156%
54%
438%
17. 4
34. 8
Om an
Q atar
75. 6
Saud i Arabi a
U ni ted Arab E m i rates
Source: World Bank, AlJazira Capital Research
* Net Foreign Assets is the total foreign assets at the monetary authorities and cash deposits at banks, less obligations to foreign parties
We believe that KSA, the UAE, Qatar, and Kuwait are not under any severe pressure to devalue or unpeg
their currencies.
Cheaper yuan to boost growth in the UAE
The move by PBoC to devalue the yuan will benefit the UAE trade balance, as Chinese imports will become
marginally cheaper. China accounts for largest share in the UAE imports. As of 2014, China accounted for
11.7% of the total UAE’s imports. The devaluation could ease inflation in the UAE and would benefit trading
and logistics companies in the country. On the export side, oil dominates the overall exports and with no
sign of decline in oil imports by China, the impact on exports is expected to be minimal.
28
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Figure 20 Country-wise UAE’s import share
Figure 21 Country-wise UAE’s export share
C H I NA, %
11. 7
U SA, %
G C C ,%
22. 8
10. 1
Oth ers ,
% 40. 4
I NDI A,
% 9. 2
I ran,
% 14. 4
Oth ers ,
%
62. 8
G E R MANY
% 6. 1
C h i na, I raq ,
% 3. 1 % 8. 4
JAP AN,
% 5. 6
I nd i a,
% 14. 0
Source: UAE Government Stats, AlJazira Capital Research
Source: UAE Government Stats, AlJazira Capital Research
*as of 2014
*as of 2014
The economic impact of devaluation of yuan depends on how the commodity prices (specifically oil prices)
and regional economic growth are impacted. Lower oil prices may imbalance global as well as regional
economy. China, the largest commodity importer, powered global growth for a while and slowdown in its
economy can impact global commodity markets. Hence, export-oriented GCC countries may be impacted,
thereby affecting the UAE. GCC accounted for the largest share of UAE exports (22.8%) in 2014. If currency
devaluation rekindles growth in China, the UAE will benefit the most.
KSA’s exports may contract, but financial stability to provide support to the currency
Devaluation of yuan prompted discussions whether KSA would follow the same route and devalue its peg.
China’s move has driven other countries, such as Kazakhstan and Vietnam, to follow suit. The move has also
triggered a broad sell-off in emerging market currencies.
29
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Figure 22 SAR forward point vs Yuan
Figure 23 TASI vs Yuan
9,000
0. 161
8,000
0. 160
0. 158
5,000
0. 157
4,000
0. 156
3. 75
0. 155
3. 74
0. 154
42248
42242
SAR 1 2 M
42236
f o r w a r d
42230
p o in t
42226
42220
0. 153
0. 158
0. 157
0. 156
3,000
2,000
0. 155
1,000
0. 154
0
0. 153
CNY/USD (RHS)
TASI
Source: Bloomberg, AlJazira Capital Research
42
21
9
3. 76
0. 159
6,000
42
22
5
3. 77
7,000
42
22
9
0. 159
42
23
5
0. 160
3. 78
3. 73
0. 162
0. 161
42
24
1
3. 79
0. 162
42
24
7
3. 80
10,000
CNY/USD (RHS)
Source: Bloomberg, AlJazira Capital Research
SAMA has enough firepower to defend the currency
Saudi Arabia’s foreign exchange reserves stood at SAR 2.5tn in August 2015, equivalent to around 89%
of GDP and approximately 40 months of imports. However, a slump in oil prices and rising government
expenditure has led to a deficit in government budgeting (the first time since 2011). The reserves also
have been declining since hitting the peak value in August 2014 (SAR 2.8tn). Military action on Yemen
is also weighing on the government’s spending. However, we expect that increased bond issuances by
the government and measures, such as opening up the Saudi stock market to foreigners, would ease the
pressure on foreign reserves. The reserves would continue to decline as long as the oil prices remain low,
but would be sufficient to defend its currency.
Figure 24 Saudi Arabia net foreign assets (SAR bn)
2,781
2,797
2,793
2,784
2,776
2,746
2,754
2,679
2,617
2,574
2,549
2,520
2,508
2,483
Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15
Source: SAMA, AlJazira Capital Research
Trade dynamics to be hit
China is the largest trade partner of Saudi Arabia, accounting for 12.5% of total exports and 13.4% of total
imports. Hence, the devaluation of yuan would render KSA’s imports from China cheaper, but impact the
exports. Moreover, if the measures undertaken by PBoC are unable to spur growth in China, the impact
could be severe. We expect the trade balance to be marginally hit and the current account balance as
a percent of GDP to decline further, but within a sustainable level. Hence, we do not see any imminent
pressure on SAR exchange rate or the exchange rate regime followed by Saudi Arabia.
30
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Figure 26 Saudi Current Account Balance
Figure 25 Saudi trade statistics (2014)
13.0%
12.7%
13.4%
12.5%
44.1%
Imports
5.7%
12.2%
5.0%
3.6%
US
China
Japan
Exports
8.9%
South Korea
9.6%
India
Others
Source: SAMA, AlJazira Capital Research
31
© All rights reserved
%35
%30
%25
%20
%15
%10
%5
%0
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
59.3%
200
180
160
140
120
100
80
60
40
20
0
Current Account Balance (USD bn)
as a % of GDP (RHS)
Source: IMF, AlJazira Capital Research
Currency Wars and its impact
on Saudi Arabia
Please read Disclaimer on the back
APPENDIX
Source: Reuter Eikon, AlJazira Capital Research
Jul15-
May15-
Feb15-
Source: Reuter Eikon, AlJazira Capital Research
Figure 30 USD/ Russian Ruble
Figure 29 USD/ Yuan
6.5
80.0
6.4
70.0
60.0
6.3
50.0
6.2
Source: Reuter Eikon, AlJazira Capital Research
Jul15-
May15-
Feb15-
Dec14-
Oct14-
Jul14-
May14-
Mar14-
0.0
Jul15-
May15-
Feb15-
Dec14-
Oct14-
Jul14-
May14-
10.0
Mar14-
20.0
5.9
Jan14-
30.0
6.0
Jan14-
40.0
6.1
5.8
Dec14-
Jul15-
May15-
Feb15-
Dec14-
Oct14-
Jul14-
May14-
Jan14-
0.6
Mar14-
0.7
Jul14-
0.8
May14-
0.9
Mar14-
Figure 28 USD/ Yen
130.0
125.0
120.0
115.0
110.0
105.0
100.0
95.0
90.0
85.0
80.0
Jan14-
Figure 27 USD/ Euro
1.0
Oct14-
Appendix − Exchange rates post 2014
Source : Reuter Eikon, AlJazira Capital Research
Figure 31 USD/ Kazakhstan Tenge (KZT)
260.0
240.0
220.0
200.0
180.0
160.0
140.0
120.0
32
Jul15-
May15-
Feb15-
Dec14-
Oct14-
Jul14-
May14-
Mar14-
Jan14-
100.0
Source: Reuter Eikon, AlJazira Capital Research
© All rights reserved
RESEARCH DIVISION
AGM - Head of Research
Abdullah Alawi
+966 11 2256250
[email protected]
Analyst
Sultan Al Kadi
+966 11 2256115
[email protected]
+966 11 2256374
[email protected]
General manager - brokerage services and sales
AGM-Head of international and institutional
AGM- Head of Western and Southern Region Investment Centers & ADC
Ala’a Al-Yousef
brokerage
Brokerage
+966 11 2256000
[email protected]
Luay Jawad Al-Motawa
Abdullah Q. Al-Misbani
+966 11 2256277
[email protected]
+966 12 6618400
[email protected]
AGM-Head of Sales And Investment Centers
AGM-Head of Qassim & Eastern Province
AGM - Head of Institutional Brokerage
Central Region
Abdullah Al-Rahit
Samer Al- Joauni
Sultan Ibrahim AL-Mutawa
+966 16 3617547
[email protected]
+966 1 225 6352
[email protected]
Jassim Al-Jubran
+966 11 2256248
[email protected]
BROKERAGE AND INVESTMENT
CENTERS DIVISION
RESEARCH
DIVISION
Talha Nazar
Analyst
+966 11 2256364
[email protected]
AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and
operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct
securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory,
and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied
the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira
Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and
International markets, as well as offering a full suite of securities business.
1.
RATING
TERMINOLOGY
Senior Analyst
2.
3.
4.
Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target.
Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels
over next twelve months.
Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target.
Stocks rated “Underweight” would typically decline by over 10% from the current price levels over next twelve
months.
Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks
rated “Neutral” is expected to stagnate within +/- 10% range from the current price levels over next twelve
months.
Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further
analysis of a material change in the fundamentals of the company.
Disclaimer
The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for
any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation
to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake
risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on
his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or
microeconomic variables are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face
some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by
Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be
condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness
or correctness of the information and opinions contained in this report. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or
otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price
targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might
increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might
get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special
circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees
in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the
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mentioned in this document as part of a diversified portfolio over which they have no discretion. This report has been produced independently and separately by the Research
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