Russia has similar inflation to the UK but interest-rates are ~8% higher

As a contrast to the Bank of England move or not at midday which I analysed yesterday let us look at developments at another point of the interest-rate cycle. To do this we need merely to look at Russia where this was announced this last Friday.

On 27 October 2017, the Bank of Russia Board of Directors decided to reduce the key rate by 25 bp to 8.25% per annum.

We learn various things here. Firstly even in this time of Zero Interest Rate Policy ( ZIRP) and indeed NIRP where N = Negative we see that there are countries where the trend has bypassed. Much of Africa has been too. I also note that 0.25% moves seem to be en vogue for which we in the UK should be grateful as I recall the Bank of England hinting at a 0.15% cut this time last year as its Forward Guidance shot itself in the foot. Returning to the Russian situation on the face of it the move looks a bit weak in the circumstances as frankly what is moving from 8.5% to 8.25% really going to achieve? Especially if we note this about inflation.

Annual inflation holds close to 4%. Estimates as of 23 October 2017 indicate that annual inflation is 2.7%. Its downward deviation against the forecast is driven mainly by temporary factors. In September, food prices showed stronger-than-expected annual price decline, on the back of larger supply of farm produce. This extra supply owes its origin to growing crop productivity and the shortage of warehouse facilities for long-term storage. The slowdown of inflation was also triggered by exchange rate movements.

Inflation is projected to be close to 3% by late 2017; going forward, as the temporary factors run their course, it will approach 4%.

So we see that the inflation situation currently has quite a few similarities with the UK as our inflation will also be close to 3% late this year and our inflation has a strong exchange rate influence as well. Yet interest-rates are around 8% different! Central bankers eh?

Let us look deeper.

Oil and Gas

This is a powerful player in the Russian economy and the recent rise in the oil price will put a smile on economic developments. In July an economic paper from the University of St. Petersburg put it like this.

In the first phase of the shock, the government’s income suddenly increases. In other words, the price rise enhances the real national income through the increase in the petroleum exports revenues. This might lead to the reinforcement of the national currency value (or foreign currency depreciation) in the exchange rate systems (fixed or managed floating systems). In the floating exchange rate system, the foreign exchange coming from the increase in the world oil prices would lead to the appreciation of the real exchange rate.

Actually the value of the Rouble and the oil price are correlated over time. If we look back to a nadir for oil prices back in early 2016 when the Brent Crude benchmark fell into the mid-30s in US Dollar terms then it took 75 Roubles to buy one US Dollar. If we skip forwards to today when Brent Crude is around US $60 we see that it takes only 58 Roubles to buy one US Dollar. They do not always move in lock step but over time there is usually a similar trend.

Thus we get to the conclusion that a higher oil price reduces Russian inflation. This does not mean that it does not raise domestic inflation as of course there will be familiar price rises from fuel costs which will trigger other price rises. But that there will be an offsetting move from a higher currency that usually is larger. Accordingly I find this from the Bank of Russia a little strange.

Inflation expectations remain elevated. Their decline has yet to become sustainable and consistent.

We are back to a timing issue as in you need to move ahead of events rather than waiting for them to happen and chasing them.

Impact on the Russian economy

The US Energy Information Authority published this on Tuesday.

Russia was the world’s largest producer of crude oil including lease condensate and the third-largest producer of petroleum and other liquids (after Saudi Arabia and the United States) in 2016, with average liquids production of 11.2 million barrels per day (b/d). Russia was the second-largest producer of dry natural gas in 2016 (second to the United States), producing an estimated 21 trillion cubic feet.

So a big deal which has this impact domestically.

 Russia’s economic growth is driven by energy exports, given its high oil and natural gas production. Oil and natural gas revenues accounted for 36% of Russia’s federal budget revenues in 2016.

Also it is the major export.

In 2016, Russia exported more than 5 million b/d of crude oil and condensate……..Russia also exports fairly sizeable volumes of oil products. According to Eastern Bloc Research, Russia exported about 1.3 million b/d of fuel oil and an additional 990,000 b/d of diesel in 2016. It exported smaller volumes of gasoline (120,000 b/d)[50] and liquefied petroleum gas (75,000 b/d) during the same year.

As to the impact on the overall economy it is not easy to be precise as Factosphere points out.

Experts estimate the share of Oil&Gas sector in the Russian GDP to vary from 15% to 20%, but that does not take into consideration effect of a number of related and supporting industries that depend on O&G sector performance (equipment producers, transportation, etc.). Therefore, the overall influence of the sector on the Russian economy and GDP shall be much higher.


There is a fair bit to consider here but if we stick with the inflation issue then with Brent Crude Oil around US $60 per barrel it seems unlikely that Russia will see much imported inflation generated. Quite possibly the reverse. We know that the Urals production is cheaper but the principle remains. Thus the difference between it and the UK in terms of inflation prospects hardly seems to justify an around 8% interest-rate gap.

There is one clear difference though which ironically would be seen as a success in the UK. From Trading Economics.

Real wages in Russia rose 2.6 percent year-on-year in September 2017, following a downwardly revised 2.4 percent gain in August and missing market expectations of 3.9 percent. Average nominal wages jumped 5.6 percent to RUB 37,520 while annual inflation rate slowed to 3 percent, the lowest since at least 1991.

So higher interest-rates yes but nothing like that much higher. The fun comes in figuring out how much the Bank of Russia and the Bank of England are wrong!

Meanwhile it seems set to be a relatively good year for the Russian economy and a nod from it to OPEC for its efforts in raising the crude oil price. Looking ahead there are of course issues as we mull the impact of having large resources on the wider economy or what became called the Dutch Disease. One of them is the transfer of resources and wealth or if you prefer the oligarch issue.

Currently there is also the issue of economic sanctions on Russia.

Me on Core Finance TV


Norway is apparently very happy but what about house prices?

Today we are taking a trip across the North Sea to what we are told is the happiest country on Earth. From the World Happiness Report.

Norway has jumped from 4th place in 2016 to 1st place this year, followed by Denmark, Iceland and Switzerland in a tightly packed bunch. All of the top four countries rank highly on all the main factors found to support happiness: caring, freedom, generosity, honesty, health, income and good governance. Their averages are so close that small changes can re-order the rankings from year to year.

As I note that Finland is 5th this seems to be a Nordic thing although of course it does make one wonder about the criteria as well as how many copies of this were sold there by Pharrell.

Because I’m happy
Clap along if you feel like a room without a roof
Because I’m happy
Clap along if you feel like happiness is the truth
Because I’m happy
Clap along if you know what happiness is to you
Because I’m happy
Clap along if you feel like that’s what you wanna do

There are clear economic influences here as we note that Africa is apparently “waiting for happiness” and intriguingly China is like this.

People in China are no happier than 25 years ago

But returning to Norway there are clear economic influences at play.

Norway moves to the top of the ranking despite weaker oil prices. It is sometimes said that Norway achieves and maintains its high happiness not because of its oil wealth, but in spite of it. By choosing to produce its oil slowly, and investing the proceeds for the future rather than spending them in the present, Norway has insulated itself from the boom and bust cycle of many other resource-rich economies.

There is a mixture of fact and PR release there so let us look further at the Norwegian economy. Oh and being the top of any list these days poses a question.

Economic growth

This from the Norges Bank last week is not especially inspiring.

In 2016, mainland GDP in Norway grew at the slowest rate recorded since the financial crisis. Growth picked up a little between Q3 and Q4 as projected earlier.

Norway Statistics tells us this.

Continued weak growth Mainland Norway: Growth in the gross domestic product (GDP) for mainland Norway was 0.3 per cent in the 4th quarter of 2016, slightly up from the 3rd quarter.

The annual rate of growth was 1.1% and if we look into the detail there was something familiar for these times.

Consumption of goods increased by 0.6 per cent, after having mostly fallen since the 3rd quarter of 2015. Increased car purchases contributed to more than half of the rise in household consumption of goods.

A hint of easy monetary policy which these days often appears in the car sector. Also something else seems rather familiar.

The declining wage growth that we have seen in recent years will continue, and estimates for 2016 show that the average annual wage growth was 1.7 per cent.

If we return to the Norges Bank report we see that real wages have fallen.

The consumer price index (CPI) rose by 3.6% between 2015 and 2016, while consumer prices adjusted for tax changes and excluding energy products (CPI-ATE) rose by 3.0% in the same period.

A lot of the impact here has been from the oil and gas sector.

What about monetary policy then?

Here we go.

Norges Bank’s Executive Board has decided to keep the key policy rate unchanged at 0.5%. The Executive Board’s current assessment of the outlook suggests that the key policy rate will most likely remain at today’s level in the period ahead.

So like so many other central banks they ignore inflation being above its target ( which is 2.5%) and concentrate on economic growth.

In the wake of the decline in oil prices since summer 2014, the key policy rate in Norway has been reduced in several steps. Monetary policy is expansionary and supportive of structural adjustments in the Norwegian economy,

So far the oil price and industry has been a silent elephant in the room but if we defer that to later let us look at the dangers from low interest-rates which are domestic debt and house prices.

House Prices

Today’s data release tells us this.

On average, prices for new dwellings have increased by 10.4 per cent in the 4th quarter of 2016 compared to the same quarter in 2015…….Prices for existing flats, small houses and detached houses have increased by 15.9, 9.9 and 7.6 per cent respectively from the 4th quarter of 2015 to the 4th quarter of 2016.

If we look into the detail we see that the prices for flats ( multi dwelling apartments) are driving this move. Let us remind ourselves that this compares with wage growth of 1.7% and real wages which are falling and it comes on the back of previous rises. The flats index was at 80 in the first quarter of 2011 and has risen to approximately 117. If we look back for what has happened in the credit crunch are we see that house prices have doubled since 2005 ( to be precise the index is 199.3).

What about debt?

The Norges Bank puts it like this.

Persistently low interest rates may lead to financial system vulnerabilities. The rapid rise in house prices and growing debt burdens indicate that households are becoming more vulnerable. By taking into account the risk associated with very low interest rates, monetary policy can promote long-term economic stability.

That lest sentence is a contradiction in terms designed to fool the unwary I think. We see that borrowing was on the march.

Net incurrence of loans increased from NOK 167 billion to NOK 186 billion, while net investments in deposits decreased from NOK 65 billion to NOK 55 billion.

Debt growth was 5.6% in 2016 and that left the debt to income ratio at 2.35.  Back to the Norges Bank.

Growth in household debt accelerated through the latter half of 2016, and debt is still growing faster than household income. The rapid rise in house prices and growing debt burdens indicate that households are becoming more vulnerable.

The mortgage rate series at Norges Bank was at 3.98% as 2013 ended and 2.49% as 2016 ended so we can see the pattern although the low was 2.35% last August. It is not a surprise to see money supply growth be firm.

The twelve-month growth in the monetary aggregate M3 was 6.5 per cent to end-January, up from 5.4 per cent the previous month.

The debt situation for the government is rather unique. It does have some but if you put in the sovereign wealth fund then net financial assets must be around treble annual GDP.


If we look at the elephant in the room then the oil and gas sector accounts for around 22% of Norway’s economic output. If we add in the fishing industry then Norway is especially gifted in terms of natural resources. The catch in recent times has been the fall in the price of crude oil which sees the Brent benchmark just above US $51 per barrel as I type this. In terms of an annual comparison the price is higher and Norway is one of the countries which most welcomes that but it is a far cry from the US $100+ of a couple of years ro so ago. This has been picked up in the unemployment data where the unemployment rate headed towards 5%. It has now fallen to 4.4% but there are other worries here.

the seasonally-adjusted unemployment decreased by 0.4 percentage points, or 12 000 persons………the seasonally adjusted number of employed persons decreased by 22 000 persons from September to December.

Meanwhile the central banks eases and pumps up the housing market. Maybe us Brits have set a bad example but what must first-time buyers and the younger generation think of this as a strategy?

Let me leave you with something very Norwegian.

A total of 30 800 moose were shot during the hunting year 2016/2017; a decrease of 300 animals from the previous hunting year and a decrease of 22 per cent from the record hunting year 1999/2000.


What is the economic impact of a higher crude oil price?

One piece of economic news dominated all other yesterday and it was at least a change for the Trump and Brexit circuses to take something of a break. Instead we had the OPEC circus which finally came up with something. Of course we know that announcements are one thing and implementation another but there was an immediate impact on the crude oil price. From Reuters.

The price for Brent crude futures (LCOc1), the international benchmark for oil prices, jumped as much as 13 percent from below $50 on Wednesday and was at $52.10 per barrel at 0806 GMT, although traders pointed out that part of the jump was down to contract roll-over from January to February for Brent’s front-month futures.

U.S. West Texas Intermediate (WTI) crude futures rose back above $50 briefly before easing to $49.63 a barrel at 0806 GMT, though still up 20 cents from its last settlement.

Volumes were very high too which makes a past futures traders heart lighter although of course we need to note that this is a result of yet more central planning.

The second front-month Brent crude futures contract, currently March 2017, traded a record 783,000 lots of 1,000 barrels each on Wednesday, worth around $39 billion and easily beating a previous record of just over 600,000 reached in September. That’s more than eight times actual daily global crude oil consumption.

Also as we note the influence at times of banks on commodity markets ( I believed their trading desks helped drive the last commodity price boom) maybe such high volumes are a warning signal too. But if this lasts we have the potential for a type of oil price shock as we have become used to relatively low oil prices. Also central banks may have to make yet another U-Turn as of course they may find that they push inflation above target as a higher oil price adds to all their interest-rate cuts and QE style bond buying.

Let us have a little light relief before we come to the analysis and look at this from February of this year. From Bloomberg.

Oil could drop below $20 a barrel as the search for a level that brings supply and demand back into balance makes prices even more volatile, Goldman Sachs Group Inc. predicted.

Oh well…

A higher oil price is good for us?

I made a note of this when I first saw it as it is the opposite of my view. I also note that it is Goldman Sachs again. From Bloomberg.

Higher oil prices would be a boon for the global economy, according to Goldman Sachs Group Inc.

Really! How so?

Pricey crude means economies such as Saudi Arabia take in more money than they can spend, which financial markets help distribute through the rest of the world, boosting asset values and consumer confidence, the bank’s analysts Jeff Currie and Mikhail Sprogis wrote in a Nov. 22 research note.

Apparently we can ignore the elephant in the room.

Forget the stagflation of the 1970s.

Here is the explanation.

“The difference between today and the 1970s is that oil creates global liquidity through a far more sophisticated financial system,” Currie and Sprogis wrote. “More sophisticated financial markets in the 2000s were able to transform this excess savings into greater global liquidity that increased asset values, lowered interest rates, and improved credit conditions that spanned the globe.”

Convinced? Me neither and it is hard to know where to start. One view is that the world economic expansion drove the oil price higher. Another is that greater global liquidity is an illusion as we see so many markets these days which seem to lack it. For example we are seeing more “flash crashes” like the one which happened to the UK Pound overnight a few weeks or so ago. This is of course in spite of the fact that central banks have been doing their best to create global liquidity and indeed cutting interest-rates.. Still if it created “increased asset values” the 0.01% who no doubt represent Goldman Sachs best clients will be pleased. As a final rebuttal this ignores the impact of lower oil prices on inflation and the key economic metric which is real wage growth.

Did the credit crunch never happen?

From 2001 to 2014, excess savings outside the U.S. grew to $7 trillion from $1 trillion as oil climbed, according to Currie and Sprogis. The savings helped drive up values of things like homes and financial assets and loosened credit markets for consumers.

I guess this is the economics version of all those strings of alternative universes in physics where Goldman Sachs is in another one to the rest of us, or simply taking us for well, Muppets.

They are not the only ones as the IMF got itself into quite a mess on this front back in February.

Persistently low oil prices complicate the conduct of monetary policy, risking further inroads by unanchored inflation expectations. What is more, the current episode of historically low oil prices could ignite a variety of dislocations including corporate and sovereign defaults, dislocations that can feed back into already jittery financial markets.

Are these “jittery financial markets” the same ones that Goldmans think are full of liquidity? Also you may note the obsession with central banks and monetary policy and yes asset values are in there as well.

Returning to Reality

There is an income and indeed wealth exchange between energy importers and exporters. For example Oxford Economics did some work which suggested that a US $30 fall in the oil price would boost GDP in Hong Kong by 1.5% but cut it in Norway by 1.3%. So we get an idea albeit with issues in the detail as I doubt the UK (0.8%) would get double the GDP benefit of Japan (0.4%) which of course is the largest energy importer in relative terms of the major economies. Oh and there are bigger negative effects with Russia at -5% of GDP and Saudi Arabia at -4%.

However the conclusion was this.

Lower oil prices should give a sizeable boost to world GDP in 2015 and 2016

There was a time (July 2015) when the IMF thought this as well.

Although oil price gains and losses across producers and consumers sum to zero, the net effect on global activity is positive. The reasons are twofold: simply put, the increase in spending by oil importers is likely to exceed the decline in spending by exporters, and lower production costs will stimulate supply in other sectors for which oil is an input…… the fall in oil prices should boost global growth by about ½ percentage point in 2015–16,

It would also produce a fall in inflation which will be welcome to those who are not central bankers.


Should the oil price remain higher it will reduce global economic growth and raise inflation. If we compare it with a year ago it is around 10 US Dollars higher but we also need to note that in December 2015 the oil price fell to the Mid US $30s so we need to do the same to prevent an inflationary effect. As I have been writing for some months now unless we see large oil price falls inflation is on it way back. We are of course nowhere near the US $108 that a Star Trek style tractor beam seemed to hold us at a while back. But as I note the rise in some metals prices ( Zinc and Lead in particular) commodity price rises are back in vogue. So there will be plenty of work for those economists who want higher inflation explaining how they are right be being wrong.

There will also be relative shifts as consumers will be poorer as real wages fall but say shops in Knightsbridge and the like seem set to see more Arab customers. Japan will be especially unhappy at a higher oil price. But US shale oil wildcatters might be the happiest of all right now and may even boost US manufacturing as well. In the UK there will be a likely boost for the Aberdeen area.

Me on TipTV Finance

“Outlook for RBS is dreadful”, says Shaun Richards – Not A Yes Man Economics







Venezuela plumbs the economic depths of hyper-inflation and depression

Over the lifespan of this website there has been an extremely sad story as I have detailed the economic depression in  Greece and the way that those supposedly helping have in many ways made it worse. Yet even it is being thrust aside as the worst economic case right now by the crisis which is enveloping Venezuela. No doubt you have read about the various shortages of which the lack of toilet rolls was the most publicised. Well according to France 24 the state of emergency which has been imposed has now led to shortages in an even more basic commodity food.

Lopez described herself as a former partisan of the socialist “revolution” started by late leader Hugo Chavez and continued by Maduro.

“Here in Guarenas there were revolutionary supporters. But now the people no longer want revolution — what they want is food,” she said.

“The people are going hungry. We are tired of lining up, of killing ourselves for just a carton of eggs or some bread,” she said.

The BBC reports that this situation has come about because of this.

With subsidised goods becoming increasingly scarce, many Venezuelans have been forced to queue for hours to get the essentials.

When a sought-after staple such as cornflour arrives at a supermarket, the word will spread quickly over social media and hundreds of people will queue to get it.

Apart from the hunger issue no economy can function if its citizens are having to spend so much time queuing for basic necessities. So what has gone wrong?


The IMF reported on inflation in central America last week and opened with one of the drivers of it.

Falling global commodity prices and the normalization of monetary policy in the United States have contributed to widespread currency depreciations in Latin America…….Indeed, prices are on the rise in Latin America while they stagnate in the rest of the world.

Then it notes this.

two of the region’s largest economies—Venezuela and Argentina—have the highest inflation rates in the world

Actually whilst Argentina has a serious problem of its own Venezuela is on a different scale although for some reason the IMF does not show it on the chart below.

So how does inflation averaging some 122% in 2015 grab you? That is hyper-inflation in anybody’s language and it comes at a time when inflation is supposed to be dead. The IMF gives us a strong hint as to a major cause of it.

exchange rate pass-through remains larger than warranted.

The IMF cannot resist the central banking mantra of these times in spite of the calamity taking place in Venezuela.

rightly tolerating a temporary period of higher inflation that was outside their control.

Others have estimated the inflation rate to be even higher than the IMF calculations. Professor Steve Henke suggested it was 700% last August. Actually in January the IMF suggested it such a level had not happened it was on its way.

Inflation will surge to 720 percent in 2016 from 275 percent last year, according to a note published by the IMF’s Western Hemisphere Director, Alejandro Werner.

However you calculate it and indeed define it we are clearly seeing a case of hyper-inflation in Venezuela. I believe it is still illegal there to calculate inflation so if I was there I would be in jail. Oh and this from the Guardian in February indicates that even the falling oil price is not helping to reduce inflation.

Prices at the pump in Venezuela will jump as much as 6,086% for 95 octane gasoline, from 0.097 bolivars to 6 bolivars, or 1,300% for 91 octane as of Friday.

Economic Output

We fear the worst once we read things like this from the IMF.

Further declines in commodity prices have added to the marked downturn that began in global metals markets during 2011 and in oil markets during 2014………Foregone income varies according to the relative importance of commodities in the economy, being very large for Venezuela (about 17 percent of GDP),

So already we are describing a combination of hyper-inflation and an economic depression on a very severe scale. The current situation is described below.

Real GDP fell by about 6 percent in 2015, according to the central bank, and is expected to fall by an additional 8 percent in 2016.

Actually with inflation at such a high level such calculations must be very difficult to say the least. Some of this is due to an inability to invest and buy the equipment required.

Available foreign exchange has been mostly used to finance imports of basic goods, at the expense of intermediate and capital goods.

There is a correlation between the economic output decline and rises in unemployment which we can glean from this.

In Brazil and Venezuela, a one percentage point increase in growth lowers the unemployment rate by 0.2 percentage points; in Argentina the impact is about half as strong.

The detail for Venezuela is a -0.27 coefficient or last year and this are expected to increase the unemployment rate by a grim 3.8%. Employment peaked above 13 million and is expected to lose a million of that. Oh and if only the IMF had applied this line of thought to its activities in Greece.

But what matters more to the person on the street is how growth translates into jobs.

The Exchange-Rate

This is always a sign of trouble,trouble,trouble.

an increase in the parallel market exchange rate

We have seen in Ukraine for example how lack of confidence in the national currency can be described by one of Britney’s hits.

Don’t you know that you’re toxic

Not so long ago the disarray was highlighted by the fact that there were as many as four official exchange-rates! But in March there was a drop to two, except as the quote from Bloomberg below details there is an obvious problem.

The Dicom exchange rate will begin at 206 bolivars to the dollar and then “float” to meet market needs, Perez Abad told reporters Wednesday at the central bank. The primary exchange rate of 10 to the dollar will apply to essential imports, such as medicines.

There is, ahem, quite a gap between 10 and 206 don’t you think? That seems unlikely to be it as we note the need to “float” afterwards. Those of a nervous disposition might like to think of the calming hit by the Floaters before I reveal reality.

Float, float on (Come on, come on,
(Come on, baby, yeah, yeah)
Float on, float on (Ooh, ooh, baby)
Float, float, float on
Float on (Float with me), float on

According to a single US Dollar will buy you some 1075.47 Bolivars. This no doubt makes the situation described by Forbes even worse.

The economic policies of Presidents Chavez and Maduro have combined to make the country’s banknotes worth less than they paper they’re printed on. Of course, this has been true for some time of the small notes: but reasonable calculations tell us that this is either true now or about to be true of the country’s largest bank note, the 100 Bolivar.

You may have read that this web is so tangled that Venezuela cannot afford to buy new bank notes as it imports them and the exchange rate has fallen so far. No sensible printer will be accepting an official exchange-rate a hundred times worse than the real one!

This is steps on a mantra for central bankers. You see they clean up from a concept called seignorage where they issue for example a £20 note which costs say 10 pence to prodice and hey presto! They have a £19.90 profit. Well not in Venezuela unless they produce larger denomination notes which of course takes us back to today’s theme of hyper-inflation. I guess if there is a lateral thinker there they could print some US Dollars like Zimbabwe has.


We are seeing the consequences of a hyper-inflationary shock in Venezuela. Back in the early days of this website I was regularly asked about hyper-inflation risks as QE style policies were fired up and I replied it required quite a list of policy errors to go wrong. Well Venezuela has had some bad luck with the oil price but it has made policy mistake after mistake including this one.

Fueled by the monetization of the large
fiscal deficit

Meanwhile next week in unrelated news Lord “talentless ascent” Turner will be granted the honour of a speech at the Bank of England on amongst other things his favourite topic of Helicopter Money. You will not have to look far online to find plenty of “experts” assuring you that it cannot go wrong. On a lighter note here is the “expert” Mark Weisbrot in the Guardian in 2013.

Sorry, Venezuela haters: this economy is not the Greece of Latin America

It is a feature of modern times how if you disagree with someone you become a “hater” is it not? I guess Taylor Swift has to take some responsibility here. But I am rather sad that a country with the largest reserves of crude oil is rewriting the text books on both hyper-inflation and Dutch-Disease.

Egypt is suffering from both the lower oil price and the currency wars

Today I intend to take a trip to a country which has a rich history. There are of course the Pyramids for starters but also the city of Alexandria which has been described thus in the Guardian today.

“Alexandria was the greatest mental crucible the world has ever known,” claim Justin Pollard and Howard Reid, authors of a book on the city’s origins. “In these halls the true foundations of the modern world were laid – not in stone, but in ideas.”

The lighthouse,library and museum went on to achieve great fame but the man whom it was all named after never lived to see it as Alexander the Great went off on other campaigns and met his own demise. However this rich history is clashing with a very troubled present as the groundswell of the Arab spring meet a lower oil price and both actual terrorism and the fear of it impact.

The Egyptian Pound

This morning’s news comes to us from Arab Economic News.

The Egyptian central bank devalued the pound by almost 13 percent at an “exceptional” sale of dollars on Monday.

The central bank said it sold $198.1 million to local lenders at 8.85 pounds per dollar. That compares with a previous exchange rate of 7.73 pounds. It wasn’t immediately clear whether the lower price is just limited to Monday’s dollar sale. Central bank officials weren’t immediately available for comment.

I do like the idea that you could devalue just for one day! Especially as we are immediately given a clue as to why this has happened.

Egypt is grappling with a dollar squeeze that is threatening economic growth in the most populous Arab country. Foreign-currency reserves have tumbled by more than 50 percent since 2011, though they have stabilized at just over $16 billion in the past six months.

When a country sees a rush for US Dollars that is invariably a sign of what Taylor Swift would call “trouble,trouble,trouble” and can end up in the sort of situation I have described in the past in Ukraine were it becomes a parallel currency for some anyway.If we return to the foreign reserves situation we see another familiar tale as Reuters take up the story.

Egypt’s reserves have dropped from $36 billion in 2011 to $16.53 billion at the end of February.

Over this time the currency has been falling as @RtrsAgAnalyst points out.

As you can see the period after the Arab Spring has seen both currency declines and foreign exchange reserve falls in a familiar pattern for a fixed exchange rate. According to Renaissance Capital it had the most overvalued currency in real terms of any of the Emerging Markets. That is no doubt related to pegging your currency against the strong US Dollar. In a way this from Gerry Rice of the International Monetary Fund in January confirms this.

We would like to stress the need to raise exports in order to promote growth and for exchange rate flexibility to support this, allowing the exchange rate to move to a market clearing rate where supply meets demand, would boost exports, and prevent foreign exchange shortages.

Those who have followed the disastrous policies the same IMF has applied to Greece may reasonably be wondering why a “market clearing (exchange) rate has been denied to it? Perhaps it might provide an antidote to the usually sycophantic media coverage of its Managing Director Christine Lagarde if style could be replaced by substance. After all the quote about is a clear critique and indictment of IMF policy in Greece.

Why are devaluations invariably too late?

I think that there are three major reasons for this. The first is that establishments and what are considered to be elites tend to be much less intelligent than they think they are. Secondly reality is rarely a friend of theirs. Thirdly and interrelated to all this is that they usually try to get their own money out first! In a way this news from China from Saturday highlights this. From Bloomberg.

China is tightening restrictions on the use of third-party payment providers to buy insurance products in Hong Kong as authorities move to stem outflows of the yuan.

I am sure we will find investment elements in these products as we note how inventive people can be. Personally I believe that sometimes the authorities are slow to close down such channels – after all some US $1 Trillion has reported fled China in the last year -because they want a slice of the pie!

The economy

Last September the IMF pointed out that it was not all bad news.

Macroeconomic figures also point to some improvement, with growth rebounding to 4.2 percent in 2014/15, and inflation has declined.

However we feel a chill down our spines as we see the word “resilience” applied to the banking sector as that usually means it is either going to need it or a bailout will be required. Also at a time of political disquiet we are reminded of “trouble,trouble,trouble” again.

At the same time, unemployment remains high notably among the youth

Only six months before Christine Lagarde had pointed out this.

Over the coming five years, there will be more than 600,000 new entrants to the labor market per year.

Have you noticed how according to the world establishment both growing and shrinking workforces are a bad idea?! Poor old Goldilocks never seems to have her porridge just right or in IMF speak.

This is a moment of opportunity.

For those of you wondering things are not as bad a being “on track”. Although perhaps the IMF will inform us as to how raising taxes such as introducing the same VAT which has cause so much economic pain in Greece will help the poor in Egypt.

What now?

The currency controls imposed a year ago had created a bit of a crunch on the economy according to Reuters.

At the same time, the central bank lifted caps on withdrawals and deposits of foreign currencies for individuals and companies importing essential goods, easing forex controls imposed a year ago that had all but paralysed trade……..Businesses who saw a devaluation as inevitable were holding back on investment.

Also there is the issue of lower receipts from tourism as the impact of the Russian plane crash in Sinai and as we mull lower figures for the Baltic Dry Index this consequence from the Middle East Monitor.

a decline in revenue from the Suez Canal

The latest economic growth numbers showed 4.5% but they are from the middle of last year and with the workforce growth we note that per capita growth will be less. Any slowing will only reduce progress on that front and reinforce Egypt’s long-standing problems with poverty and inequality. As to interest-rates some 15% is being offered to investors today on some 3 year bills as long as you can provide some foreign exchange and inflation is 9.1%. For a description of that mixture let me hand you over to Ms. Britney Spears.

Don’t you know that you’re toxic


Any economic woe poses its own problem in a country that is already so troubled. For example lawmakers have accused the European Parliament of being influenced by the Muslim Brotherhood which as far as I know not even Nigel Farage accuses them of. Meanwhile the economy is one of those being affected by the lower oil price as the US EIA indirectly highlights.

Egypt is the largest non-OPEC oil producer in Africa and the second-largest dry natural gas producer on the continent.

Also Egypt has relied on loans from Saudi Arabia and the United Arab Emirates to finance its balance of payments problems and such funds must be in shorter supply. Add the issues described above and 2016 will be hard going especially as the troubles have seen falling gas production in spite of new fields being found.

On the upside there is this from the IMF research although of course it is not clear how this can coexist with the spread of fundamental Islam.

For instance, Aguirre and others (2012) suggest that raising female labor force participation to country-specific male levels would boost GDP in the United States by 5 percent,
in Japan by 9 percent, in the United Arab Emirates by 12 percent, and in Egypt by 34 percent.

Oh and who always benefits from establishment moves?

Commercial International Bank surged 7.0 percent and investment bank EFG Hermes jumped 9.9 percent. Real estate developers Egyptian Resorts and Talaat Mostafa Group each climbed more than 8.0 percent. (Reuters)






The oil price shock is affecting Nigeria badly

The economic feature of the last 18 months or so has been the lower oil price and as time has gone by the much lower oil price. Overall this is beneficial to the world economy but producers such as many states in the Middle East, Russia and parts of the United States and Canada are seeing a deflationary impact. However there has also been a deflationary shock to the African countries which produce crude oil and one of them in particular has responded in an unusual manner in monetary terms so step forwards Nigeria.

An appreciating exchange rate?

The situation here is quite unusual as it is quite rare to see an appreciating exchange-rate for an oil producer in response to lower oil prices. Actually as the exchange rate is regularly reported as being fixed you may wonder how it has risen at all but we get the answer from last week’s report from the Central Bank of Nigeria.

The exchange rate at the interbank market opened at N197.00/US$ and closed at N197.00, with a daily average of N196.99/US$ between November 23 and January 11, 2015.

Okay so we have a fixed exchange-rate against the US Dollar which means that as it has risen it has taken the Nigerian Nairu with it. At a time like this that seems rather like one of the cunning plans issued by Baldrick in the television series Blackadder! Nonetheless this remains policy although of course Friday’s move by the Bank of Japan showed us that policy promises only a week old can be reversed.

It also reiterated its commitment to maintaining stability in the naira exchange rate.

This new period of what has turned out to be an exchange-rate appreciation of AROUND 6% followed two devaluations where the Naira was devalued by 8% in November 2014 and then by 17% in February of 2015. Talk about a confused situation or if you like something of a shambles! Even fixed exchange rates are not what they used to be in the credit crunch era or to be more precise in fact this is a currency pegged to the US Dollar and right now that is not a good place to be for an oil producer like Nigeria.

The next issue for a pegged currency is what is the size of your foreign exchange reserves? From the Financial Times.

The central bank’s foreign exchange reserves have nearly halved to $28.2bn from a peak of almost $50bn just a few years ago. A rainy-day fund that had $22bn in it at the time of the 2008-09 global financial crisis now has a balance of $2.3bn.

Let us remind ourselves that the rate of decline for official exchange reserves is as important as the total and in fact more so as they shrink. Also that the issue is more important for a pegged exchange rate than a floating one. Added to this are the problems highlighted this morning by The Premium Times.

the parallel market sells dollars to those who would buy at N305

So not 196.6 then? Oh and the exchange-rate numbers may not be all they are cracked up to be either.

First, the US$28bn balance on the foreign reserve account is almost nearly fictional.

The reason given for this is that the Central Bank has obligations such as letters of credit futures and swaps which are not acccounted for.

So as we sweep up we have a country which officially has an appreciating currency in reality has one which has depreciated.


The theme that in fact there has been a devaluation in practice gets some support from the numbers below.

The Committee noted the slight uptick in year-on-year headline inflation to 9.6 per cent in December, from 9.4 per cent in November and 9.2 per cent in October, 2015.

As is often the case the poorest are those that are hardest hit as I note this development.

food inflation inched up to 10.32 per cent from 10.13 and 10.2 per cent over the same period.

In a world of zero and in some cases negative inflation you only get the numbers above from a lower currency so let us mark that and move on.

Economic growth

At first the situation looks rather good especially if we compare it to the West.

Domestic output growth in 2015 remained moderate. According to the National Bureau of Statistics (NBS), real GDP grew by 2.84 per cent in the third quarter of 2015, almost half a percentage point higher than the 2.35 per cent recorded in the second quarter.

However for Nigeria this represents quite a slow down as the rate of economic growth reported was pre oil price drop more like 5-6%. This is a direct consequence of the fact that some 11% of Nigerian economic output was the production of crude oil. Not only is that now lower but of course there will be secondary job losses as the impact filters through other parts of the economy.


Price Waterhouse declared this over the weekend.

Our results show that corruption in Nigeria could cost up to 37% of GDP by 2030 if it’s not dealt with immediately. This cost is equated to around $1,000 per person in 2014 and nearly $2,000 per person by 2030.

So with a country of 174 million people the current cost is of the order of US $174 billion which is a large sum for what is still a poor country. Or to put it another way.

Nigeria’s GDP could have been 22% higher in 2014 if it had reduced corruption to Ghana’s levels.

Of course this is an issue for most of Africa. On a personal level my involvement in athletics leads me to chat to athletes who have been out to train in the Rift Valley area and each one reports the same sad experience. So there is food for thought in the fact that Nigeria underperforms what is a sad benchmark.

Added to this is the corruption surrounding the oil production where believe it or not gangs smash the pipelines to filter off oil and just leave it. So not only is there larceny and theft on a grand scale there is an environmental and ecological disaster too as the oil pours out. In addition to this individuals wheel drums of stolen oil around in the cities and try to sell it and from time to time they explode. From Bribe Nigeria.

The finance minister, Ngozi Okonjo-Iweala, a genuine reformer, has estimated that 400,000 barrels of oil a day were stolen in April.

A cry for help

This started in a by now familiar manner as The Nation reports.

Minister of Finance Mrs. Kemi Adeosun last night refuted a report published by Financial Times suggesting that Nigeria has applied for emergency loans from the World Bank and the African Development Bank.

Ah an official denial! We know what happens next don’t we? Anyway let us look at the Financial Times.

Nigeria has asked the World Bank and African Development Bank for $3.5bn in emergency loans to fill a growing gap in its budget in the latest sign of the economic damage being wrought on oil-rich nations by tumbling crude prices.


The problem is that around 70% of government revenues came from the oil sector and of course that was at a price of US $100+ and not the mid to low US $30s. They must have more than halved and Nigeria will either have to find another source of revenue or borrow more. The rationale behind borrowing from International organisations like the World Bank is that the interest-rate is likely to be a fair bit below market rates for Nigeria.


Something of note is happening in Nigeria today which is against even the policies of UK domestic ebergy companies who are belatedly cutting prices. From AllAfrica.

Under the new tariff, residential customer category (R2) in the Federal Capital Territory (FCT), Niger, Nasarawa and Kogi states, which fall under the Abuja Electricity Distribution Company (AEDC) franchise, who previously paid N14 per kilowatt/hour, will now pay N23.60 per kilowatt/ hour.

Maybe they will even bill customers properly.

The new tariff order, aside from eliminating fixed charge, has a robust mechanism to ensure that electricity distribution companies fully meter their consumers and eliminate ‘crazy’ billing within one year,” Akah said.


We see that Nigeria is in quite a mess. The fall in the oil price has exposed the ongoing problems of corruption there and it is corruption on a grand scale. We find ourselves wondering if this should be added to the definition of “Dutch Disease” as the present of oil and gas resources has in effect allowed the corruption to flourish in the background. Those who are corrupt have profited in large amounts as eyes turn again to the Swiss banks. Meanwhile the ordinary Nigerian has been cheated and now with higher food and energy prices is suffering again.

Economically we have a currency which is officially higher but in reality is lower a deflationary burst and an budget deficit. There was a time that this was be a job for the International Monetary Fund. But under its French Managing Directors Dominique Strauss-Khan and  Christine Lagarde it has twisted itself towards the needs of the Euro and away from its original modus operandi. Nigeria could so with the help of an old-style IMF.