What We're Reading:

What Russia cutting off energy to Poland and Bulgaria means for the world. The Russian national energy giant Gazprom announced on Wednesday that it was cutting off natural gas exports to Poland and Bulgaria over the countries' refusal to pay in rubles. (NPR)

A political reckoning in Sri Lanka as debt crisis grows. In recent weeks, protests have erupted across the country demanding that President Gotabaya Rajapaksa quit. The protests highlight the dramatic fall of the Rajapaksas from Sri Lanka’s most powerful political dynasty in decades to a family grasping to retain power. (AP News)

US economy shrinks in first quarter; trade, inventories mask underlying strength. The U.S. economy unexpectedly contracted in the first quarter amid a resurgence in COVID-19 cases and drop in pandemic relief money from the government, but the decline in output is misleading as domestic demand remained strong. (Reuters)

China’s lockdowns pose problems for the global economy. There’s no easy fix. The prospect of even more lockdowns isn’t welcome news for anyone relying on the world’s largest economy, especially because analysts see no easy fix for Chinese policy makers hamstrung in their ability to cushion a slowdown. (Barron’s)

Why this economy may be sturdier than it looks. From inflation to the war in Ukraine, there seem to be plenty of reasons to worry about the economy these days, but economists say it is not as worrisome as it might seem. (NPR)

German inflation hits 4-decade high for single month. The last time prices rose faster was for West Germany in 1981. More than any other factor, increasing energy prices, exacerbated by Russia's invasion of Ukraine, are fueling inflation. (DW)

Oil product shortages brewing in Northeast energy markets. Inventories of diesel and jet fuel in the Northeast are at levels not seen since 1996, and on the precipice of hitting all-time lows. And this at a time when international travel has been curtailed by pandemic-related restrictions. (Seeking Alpha)

An economic downturn is now in exec's top five risk concerns. A macroeconomic downturn has moved into the top five risks among senior executives, according to Gartner, Inc.’s latest Emerging Risks Report, which surveyed 330 senior executives in the first quarter of 2022. (MH&L)

Latin American nations ease restrictions as COVID cases drop. Even as coronavirus cases rise half a world away in China and authorities there impose new lockdowns, plummeting infection rates in Latin America have countries eliminating restrictions on mass gatherings, lifting some travel requirements and scrapping mask mandates that have been in place for two years. (AP News)

China cities toughen covid steps to avoid Shanghai’s woes. Cities across China are rolling out swift measures from mass-testing drives to lockdowns for just a mere handful of Covid-19 cases, aiming to keep flareups at bay and avoid the economic and social hardship endured by Shanghai. (Bloomberg)

US trade hits record levels amid supply chain woes and global uncertainty. The combination of an ongoing pandemic, erratic economic conditions and lingering global tensions worked in concert to create a roller-coaster environment for international trade. In the United States, inflation climbed, the supply chain was stretched thin and scores of workers quit their jobs. In spite of this, U.S. imports and exports were higher than ever. (Shipping Solutions)

Goldman sees yen falling further with or without intervention. The yen’s descent to a two-decade low fueled talks about the Bank of Japan coming to the rescue. But for Goldman Sachs Group Inc., even an intervention wouldn’t change the fortunes of the battered currency. (Bloomberg)

How to map out your digital transformation. At the start of the pandemic, businesses around the globe found themselves exposed to an unexpected boost in digitalization. Those who promised to keep the wheels turning were given carte blanche to do whatever it took to keep a company running. But as many now return to the office, they also realize that the digitalization lodestar is beginning to fade. (Harvard Business Review)

France reelected Emmanuel Macron as president with 58.5% of the vote over far-right opponent Marine Le Pen. This makes Macron the first French president to have been reelected in 20 years, according to The Economist.

Although Le Pen did not win, at 41.5%, she received more of the vote than last time, indicating that her “anti-foreigner, anti-system politics of disgruntlement are now more entrenched than ever in the psyche, thinking and political landscape of France,” reads an article from the Associated Press.

“I know for a number of our compatriot that have chosen the far right today, the anger and disagreement that led them to vote for this project must get a response,” said Macron, during his victory speech. “That is my responsibility and those who surround me.”

Macron needs a majority in parliament to implement his policies; and historically in France, the president’s party has secured that majority. However, an Elabe opinion poll taken Wednesday “shows that 61% of French voters would prefer that parliament elections on June 12 and June 19 result in a majority of members of parliament in opposition to Macron,” reported U.S. News. “That percentage rises to 69% among working-class voters and close to 90% among far-right and far-left voters.”

Without a majority, “It would be extremely difficult for Macron to pursue his own agenda,” said Sophie Pedder, Paris bureau chief of The Economist, during the webinar, Analysing the French Presidential Election.

Some experts say Macron may need to appeal to some right-leaning voters over his next five years in office. “There is this huge division between rural and urban France,” said Benjamin Haddad, senior director of the Europe Centre at the Atlantic Council during the webinar. “He will have to try and broaden his base to be more centralized and may need to try and please more rural voters.”

Macron’s reelection also means a changing role for France in the global trade arena. Macron cannot be reelected a third time, so it may allow him to govern “in a slightly different way,” Haddad said.  “He will become one of the most experienced leaders in Europe and there is an expectation that he will be a more alliance-building French president and more consultative with other European leaders.”

Ukraine will likely be at the top of his agenda. “Macron has long advocated for the EU to take more responsibility for its own defense, something he sees as complementary to the NATO alliance, and Russia’s invasion of Ukraine has only further strengthened that argument,” reads an article from ABC News.

The CPV regime has made some gestures of appeasement in response to public demands for accountability related to the management of the COVID-19 pandemic, but tolerance for dissent will be limited, especially with Russia’s invasion of Ukraine creating fresh uncertainty and increasing the risk of closer international scrutiny of regimes that engage in political repression. Officials in Hanoi have mostly kept their views on the crisis to themselves, focusing instead on dealing with the economic effects of the heavy sanctions imposed on Russia, with which bilateral trade amounted to an estimated $5.5 billion in 2021. Prime Minister Pham Minh Chinh has organized a special team to seek out alternative export markets and sources of supply.

The unwelcome prospect of constraints on global energy has emerged at a time when the country’s second largest oil refinery, the source of about 35% of the domestic fuel supply, is embroiled in a financing dispute that forced the facility to slash its output by 80% due to shortages of crude for processing. A main sticking point is a disagreement between state-owned PetroVietnam and its foreign partners over how to pay for purchases of crude imports. A short-term arrangement has been thrashed out, but to the extent that the unclear intentions of the Vietnamese partner result in the refinery’s failure to reap the economic benefits of soaring energy prices, the episode may give other prospective investors pause.

More generally, however, the country’s favorable reputation as a manufacturing base and the partial privatization of state-owned enterprises will help to sustain fairly high levels of [foreign direct investment] and Vietnam is poised to reclaim its status as one of the Asia-Pacific region’s strongest economic performers.

The overall economy grew by just 2.6% in real terms last year, a new record low. However, the formal launch of the RCEP at the start of the year will give a boost to exports and progress with COVID-19 vaccinations figures to eliminate the impediments to robust expansion in the services sector.

Less positively, the effects of a wave of coronavirus infections that peaked earlier this month is likely to be evident in the first-quarter data, and with prices for energy imports soaring and the crisis in Ukraine aggravating supply chain constraints, there are reasons to remain cautious concerning growth prospects this year. On balance, real GDP growth is forecast to hit 6% in 2022, a significant improvement on the recent performance but still below the pre-pandemic trend.

The analysis above is taken from the March 2022 Political Risk Letter (PRL). The best-in-class monthly newsletter, written by the PRS Group, provides concise, easy-to-digest briefs on up to 10 countries, with additional recaps updating prior month’s reports. Each month’s Political and Economic Forecasts Table covers 100 countries, with 18-month and five-year forecasts for KPIs such as turmoil, financial transfer and export market risk. It also includes country rating changes, providing an excellent method of tracking ratings and risk for the countries where credit professionals do business. FCIB and NACM members receive a 10% discount on PRS Country Reports and the PRL by subscribing through FCIB.

Oil prices stabilized around $100—the highest level since 2014. However, rising agricultural commodity prices are putting upward pressure on consumer price inflation in the Gulf countries.

Despite diversification efforts, hydrocarbons still represent a major source of revenue for the Gulf countries. Hydrocarbon production accounts for around 30% of GDP in the UAE, 40% in Qatar and Saudi Arabia, 20% in Bahrain and 45% in Kuwait and Oman.

Higher oil prices should thus support an in increase public sector spending and investment throughout the region. These account for nearly 40% of total final consumption expenditures and 20% of total investment in Saudi Arabia.

Higher energy prices will also boost the sentiment in the private sector, helping toincrease investment in non-oil activities. PMI data indicate that output growth remains strong in the UAE and Saudi Arabia. Both countries remain in competition to attract the foreign direct investment needed to diversify their economies. Rising hydrocarbon revenues also are expected to support the contribution of net exports to GDP growth, particularly in Kuwait and Qatar (hydrocarbons account for around 90% of total exports), Saudi Arabia (70%) and Oman (65%).

Despite the improved economic performance, especially for exports, higher prices for all commodities, including food, will strengthen inflationary pressures in the region. These pressures will be exacerbated by high shipping costs. The Gulf countries import 85% of their food needs. To increase the food supply stability, governments have opted to buy lands in producer countries, mostly in Africa and Asia. However, food accessibility can become a challenge as many producing countries have started to cap their exports to meet domestic needs and moderate inflation. Thus, while inflation in the Gulf countries will remain lower than in other areas, mainly on the back of cheaper domestically produced energy, it is expected to increase above 2.5% on average. Saudi Arabia should be an exception, as it will benefit from a favorable VAT base effect.

Furthermore, although higher energy prices will improve fiscal balances in the GCC countries, high wage bills, due in part to the number of people employed in the public sector, will continue to weigh on budgets. For example, Kuwait's budget allocates 55% of its total expenditure to wages and benefits by 2022, according to the World Bank. Overall, the outlook for growth and inflation will make central bankers in the Gulf countries confident in implementing rate hikes. In March, the central banks of Qatar, Kuwait, Saudi Arabia, the United Arab Emirates and Bahrain raised rates by 25 basis points following the Fed's decision. If the Fed tightens more aggressively than expected, the tightening of financial conditions could weigh on the momentum of domestic consumption and investment in the region.

Finally, it seems unlikely that the Gulf countries will be able to compensate for the partial withdrawal of Russian oil from international markets. Saudi Arabia's share of EU crude oil imports is almost 7.5%, while that of the UAE is less than 1%. These countries have been able to secure long-term contracts with their Asian customers through long-standing relationships. For example, 90% of Qatar's exports are tied with long-term contracts with Asian customers. Nevertheless, Qatar and Germany agreed on a long-term energy partnership in March to progress discussions on long-term LNG supplies. The EU now imports 5% of its natural gas from Qatar, compared to 41% from Russia and 16% from Norway.

 

Week in Review Editorial Team:

Diana Mota, Editor in Chief

Annacaroline Caruso, Editorial Associate