Tuesday, December 29, 2015

Over a million migrants reach Europe by sea; Gulf nations embark on reform as oil plunges; A bearish case for the Indian rupee

1 Over a million migrants reach Europe by sea (Paul Adams on BBC) More than one million refugees and migrants have reached Europe by sea since the start of 2015, the United Nations refugee agency (UNHCR) says. More than 80% of the 1,000,573 people arrived in Greece, with the majority landing on Lesbos island, it said.

About 844,000 travelled to Greece from nearby Turkey. Most of the others - over 150,000 - crossed the Mediterranean from Libya to Italy. The migrant crisis is Europe's worst since World War Two. The number of sea arrivals has increased vastly since 2014, when it was recorded at slightly more than 216,000.

"Increasing numbers of refugees and migrants take their chances aboard unseaworthy boats and dinghies in a desperate bid to reach Europe," the UNHCR said. "The vast majority of those attempting this dangerous crossing are in need of international protection, fleeing war, violence and persecution in their country of origin."

About 49% of those crossing the Mediterranean Sea are from Syria, with 21% coming from Afghanistan, it added. The number of those dead or missing at sea is now at 3,735.

While the Lesbos island feels less overwhelmed than usual, thousands more people are still waiting to be registered so they can travel further into Europe. The majority travel to Germany, which has accepted a million refugees and migrants. On 21 December, the International Organization for Migration (IOM) said the total number of migrants arriving by both land and sea had reached more than 1,006,000.

2 Gulf nations embark on reform as oil plunges (Fareed Rahman in Gulf News) Gulf countries are undertaking reforms to cut subsidies and increase fuel prices as oil hovers near eleven year lows on abundant supply and slowing demand.

Bahrain will be increasing fuel prices starting from Friday. They haven’t mentioned how much the increase would be but said the new move would contribute to providing financial savings and rationalising energy consumption. Bahrain becomes the third country in the Gulf region to bring in reforms in the energy sector after UAE and Saudi Arabia.

Saudi Arabia on Monday announced that they would raise fuel prices by 50 per cent as the country posted a record $98 billion budget deficit in 2015 due to the sharp fall in oil prices. Oman which is losing revenue in a big way could be the next one in the list, analysts said.

Edward Bell, a commodity analyst at Emirates NBD, said Qatar and Kuwait are probably in a safer position. “Kuwait historically has actually had problems in under spending. It has bit of a better fiscal position to be in. Qatar again is quite similar in that respect.”

According to Bell, there is awareness among Gulf countries that they can’t bank on oil prices staying very high for protracted period of time like in 2010 to halfway through 2014. Energy subsidies represent a direct cost of 3.4 per cent of GDP for GCC governments, and petroleum accounts for about two-thirds of energy subsidies in the GCC, while electricity and natural gas together represent another third.

3 A bearish case for Indian rupee (Matein Khalid in Khaleej Times) I watch the fall of the Indian rupee to two-year lows at 66 with deep concern. The Fed rate hikes coincide with offshore money outflows from Dalal Street, the reason the Sensex was slammed to 25,000. Conventional wisdom states that RBI Governor Rajan - India's Paul Volcker - alone is sufficient to stabilise the rupee. Wrong. The Indian rupee can well fall to 74 against the US dollar in 2016. Why?

India's banking crisis is slowly morphing into an external debt crisis. This was the reason the rupee was Asia's worst-performing currency in November 2015, even though crude oil collapsed 12 per cent even before the Vienna debacle. True, RBI reserves are $350 billion, well above the August 2013 "taper tantrum" levels at $275 billion. Yet these reserves are a mere 16 per cent of GDP, far below, say, Singapore's 100 per cent or Taiwan's 84 per cent of GDP.

India's foreign debt and external liabilities have risen alarmingly even as the current account deficit has narrowed to two per cent of GDP, thanks to a $60 billion crude oil import bill windfall. India's net international investments (assets liabilities) is now an alarming $370 billion, a six-fold rise since the 2008 financial crisis. Offshore hot money, short term borrowings and trade credit done is $300 billion.

India's foreign reserves are low compared to its external debt, a kiss of death for the rupee in a higher Fed rate and King Dollar milieu. India's external debt (government and private) is now a dangerous 1.45 times state reserves Short-term external debt is 25 per cent of sovereign reserves. The real sword of Damocles for the Indian rupee is the surge in private sector external borrowings, now a staggering 19 per cent of GDP.

India's private sector is leveraged and faces a short US dollar funding mismatch that will spell disaster in 2016 as King Dollar continues to rise. Indian banking's non-performing/restructured loan ratio is a shocking 11 per cent of all loans in 2015, the reason Dr Rajan ordered a hike in provisions. Private sector debt has basically doubled in the past decade.

To borrow a Churchillian metaphor, never in the history of Indian capitalism have so few owed so much to so many. Corporate leverage is at dangerous levels at a time when world trade is shrinking, $200 billion in bad loans gut the banking system and a fall in inflation has raised real borrowing costs. This is the worst possible global economic and monetary environment to have an external debt crisis.

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