The United States’ debt problems have piled fresh concern onto the already considerable heap of global economic worries. Fund managers are now left watching the economic numbers for signs that growth is keeping pace with predictions. MENA Fund Review spoke to Jahangir Aka, senior execitive officer at SEI Investments, about the significance of events in the US and their impact on the Middle East and North Africa region
THE US debt crisis has caused ripples throughout global financial circles and thrown markets into a period of high volatility. At first glance it looks like another blow to an already struggling world economy, but a major disaster averted nevertheless after some serious political wrangling.
Looking deeper at the issue though, it is more a case of a decision on disaster deferred and a political circus exacerbating financial woes, according to Jahangir Aka, senior executive officer at SEI Investments.
In the last 50 years the US debt ceiling has been revised 74 times, an average of every nine months, he says, which begs the question, why is it such a big deal this time around?
Some commentators have argued the difference is that US debt is now approaching 100 percent of GDP, and that milestone is causing unease in the markets. Jahangir believes it is much more to do with the political circus surrounding the Republicans’ attempts to weaken the Democrats’ credentials on economics as US presidential elections approach.
Raising the debt ceiling in itself is a “non-event per se” he says. “We think the political crisis is much more what it is about than it has been about the debt crisis.”
That said, there remain fundamental issues that the US has yet to deal with, he believes.
“If you look at the conclusion that came out of all of this, actually the deal that was struck was initially the first proposal before the bickering started,” he says.
“So in all the media sensationalisation we actually made very little progress in terms of the deal structure. And what you got was this political fighting that was going on and the deal actually, I think to most people in the industry, its pretty unsatisfying. It’s $2.4 trillion of reductions over 10 years, and a $2.1 trillion increase in the debt ceiling, so really it’s not significantly moving the needle on addressing the fundamental issue, which is the country is spending more than it’s earning.”
SEI is sceptical about the resolution and now more focused on the economic and employment numbers, which are beginning to suggest that an economic slowdown is underway in the US. This could be a temporary blip related to the Japanese tsunami and the fallout that is continuing to have on production and as a result purchasing in the US and other countries, or it could be something deeper and longer lasting. SEI is not forecasting doom, yet, but the firm’s stance is that the credit rating of the US remains vulnerable.
However, even if the US credit rating is revised down, this will not necessarily be the catastrophic event some believe, according to Aka. After all, Japan’s credit rating was previously revised down and that did not reduce its ability to fulfil its obligations, he points out.
“We are much more interested in seeing the fundamentals of the economy improving and those indicators rather than starting to go into doomsday scenarios around the collapse of the dollar, the collapse of US treasuries,” he says.
“The reality is the world can’t afford for that to happen. The world doesn’t have an alternative.”
The US situation is having ramifications for the Middle East, by increasing the already heightened sense of insecurity. Oil prices have dropped on worries of a global economic slowdown. Prices remain above the level that countries like Saudi Arabia have budgeted for, but at a time when they are spending big to calm public concerns that helped to spark the Arab Spring, these countries need all the extra income they can get, says Aka.
On top of this, some Middle Eastern countries’ currencies are pegged to the dollar so the US currency weakening against many emerging markets from which the MENA region imports is having an inflationary impact on countries that were in some cases already struggling with food price rises.
Governments across the MENA region have reacted strongly to the ongoing crisis. In some places a food price cap has been introduced, which has created challenges for supermarkets and the food industry in general.
Other governments have begun pumping large amounts of money into their economies to stimulate growth and calm social instability. Saudi Arabia, for example, has begun putting $130bn into new infrastructure and other projects in response to the Arab Spring.
“One of the things that people are worried about in Saudi Arabia is that whilst it will maintain growth and job creation, does it also provoke a surge of inflation due to this vast amount of cash being flowed into the economy,” says Aka.
While the crisis has been difficult for the region’s economies, it has potentially thrown out some opportunities for asset managers. The political circus in the US and global ripples have caused many stock prices to be discounted more than they should have been given the fundamentals of the situation, according to Aka. Some managers will be able to capitalise on this as markets normalise, he says.
Managers are also waiting and watching what happens in the US, he adds, keeping an eye on monthly numbers and in the longer term the presidential election. In addition, they are looking for hedges and diversification strategies against the potential for greater financial market turmoil.
From a speculative perspective managers in the Middle East could benefit by a general consolidation mentality that has seen many investors bring their assets home. Growing concerns about the US economy are likely to exacerbate this at the average investor level, while sophisticated investors will see it as a reinforcement of why assets should be spread, according to Aka.
“The more average investor is saying ‘ok I need to consolidate back to my home market because that’s what I understand, that’s what I can see.’ I think some of that will come back into the local and regional markets,” he says. This consolidation mentality could be beneficial to the region’s stock markets and to managers with a focus on MENA.
While asset managers and investors are watching financial information from the US for signs of change, the next big shock has probably been deferred for some time, according to Jahangir. The heightened debt ceiling will likely see the US through the next 18 to 24 months and beyond the US presidential elections, he believes.
“Certainly the smart investors are sitting and looking at it and saying ‘let’s keep a watching eye to see if anything else goes wrong, does spending get out of control?’ The biggest issue to watch is if revenue in the US drops, because if growth does not sustain or growth does not pick up then the jaw between spending and revenue will become ever wider.
“If revenue goes down and spending remains on an upward trend that of course means that the US is going to meet its revised debt ceiling quicker and it could potentially hit that sooner than the next election or the deferred 2013 that they have tried to do with this deal.”
Asset managers will be examining whether US economic growth targets are in fact being met, or fallen short of. It will be an ongoing case of watching and seeing that could create prolonged volatility or alternatively steady markets if the economic numbers are as or better than projected.
“People want to be given confidence that the economy is making as much money as these guys projected, otherwise the debt ceiling will be a new debate or a revised debate before the election and that could be pretty messy,” says Aka.
To sum up the overall situation in the MENA region, which has not been caused by the recent US economic worries but is being exacerbated by them: “There is no doubt that the biggest contributor of renewed wealth in the region is oil and whilst oil remains at the level that it is at it continues to be surplus for the economies of the region,” according to Aka.
“Ninety percent of the MENA economies are at the end of the day GCC revenue or GCC focused, so actually all the political unrest that is existing in the MENA region is somewhat not that dissimilar to Greece, it is the periphery economic impact on the region.”
This has caused greater consolidation into the Gulf, giving more momentum to the larger economies in the region. Essentially, the situation in Egypt, Tunisia and Syria has strengthened Gulf state economies and helped liquidity return.
Trade, transport and tourism in the Gulf are all growing, according to Jahangir and manufacturing is consolidating in Saudi Arabia.
“From a pure economic perspective the Middle East is starting to look pretty pleasant,” he says.
“From a political or from a social perspective the periphery economies where most of the people live continue to remain unsettled, and unfortunately it is helping the economics of the larger economies. So, from a purely capitalist perspective, it’s all going quite nicely actually. From a political perspective it’s all looking pretty messy.”