A recommended 23.55% increase in remuneration for India’s central government employees, if fully implemented, would have a significant impact on the government’s wage bill, and add to challenges the government faces in achieving fiscal consolidation targets, says Fitch Ratings.
The suggested wage increase by the 7th Pay Commission would come into effect at the beginning of the 2016 calendar year. The recommended increase is less than the 40% that was implemented after the last commission in 2008. On its own, the pay rises would increase the central government’s wage bill by around 0.5% of GDP. It is important to note though that this would also likely affect state government finances as they would be inclined to follow suit.
The central government has earlier indicated a target fiscal consolidation of 0.4% of GDP for a deficit of 3.5% in the fiscal year ending 31 March 2017 (FY17), down from 3.9% in FY16. As such, the planned wage increase is sufficient to add substantive challenges to achieving the planned medium-term consolidation targets.
The government could seek to cut expenditures in other areas. There may be some room to rein in the subsidy bill, for example. But the government may find cuts in capital expenditures undesirable, especially as investments are planned to play a key role in its efforts to stimulate the economy.
We expect the Kingdom of Saudi Arabia’s (Saudi Arabia’s) general government fiscal deficit will increase to 16% of GDP in 2015, from 1.5% in 2014, primarily reflecting the sharp drop in oil prices. Hydrocarbons account for about 80% of Saudi Arabia’s fiscal revenues.
Absent a rebound in oil prices, we now expect general government deficits of 10% of GDP in 2016, 8% in 2017, and 5% in 2018, based on planned fiscal consolidation measures.
We are therefore lowering our foreign- and local-currency sovereign credit ratings on Saudi Arabia to ‘A+/A-1’ from ‘AA-/A-1+’.
Standard & Poor’s is converting its issuer credit rating on Saudi Arabia to “unsolicited” following termination by Saudi Arabia of its rating agreement with Standard & Poor’s.
The outlook remains negative, reflecting the challenge of reversing the marked deterioration in Saudi Arabia’s fiscal balance. We could lower the ratings within the next two years if the government did not achieve a sizable and sustained reduction in the general government deficit or its liquid fiscal financial assets fell below 100% of GDP.
You probably have heard this numerous times before; the Chinese position in US Treasuries is outright dangerous and China could single-handedly force the US Dollar to weaken quite substantially. Whilst that’s definitely correct, it sure looks like one is overlooking the impact the low oil price has on the public finances of Saudi Arabia.
As the country is mainly depending on exporting its oil to keep its government budget balances, the Kingdom has been hit extremely hard by the 60% drop in the oil price as an almost certain budget surplus was suddenly converted in a huge budget deficit. In fact even during the darkest hours of the Global Financial Crisis, not a lot of countries saw their government budgets dip into the red by in excess of 20%!
As crazy as it sounds, the Saudis are going broke.
Of course you wouldn’t know it if you read the account of King Salman’s latest visit to Washington which included booking the entire DC Four Seasons and procuring a veritable fleet of Mercedes S-Class sedans.
You’d also be inclined to think that everything is fine if you simply looked at SAMA holdings (i.e. FX reserves) which still total nearly $700 billion.
After the plethora of good news on the economy, ranging from an improvement in the doing-business rankings to becoming the world’s most preferred destination when it comes to FDI, credit rating agency S&P refusing to change India’s rating from just above junk comes as a bit of a rude wake-up call. Look at it a bit deeper, and the S&P move doesn’t come as that much of a surprise. While much of the improved macro comes from purely good luck on the commodity front, the collapse of China has been the main reason for the upswing in FDI rankings – indeed, the boom in FDI comes at a time when local investment levels are at unusually low levels of 28.7% of GDP versus a high of 38% in FY08. A good way to understand this is to examine how India’s inflation and current account deficits (CAD) – the two biggest turnaround factors in the macro, along with the rupee that is directly related to both – would have looked if global commodity prices, including gold, had not turned around in the last couple of years. In just the last one year, despite exports collapsing from $81.7bn in Q1FY15 to $68bn in Q1FY16, India’s CAD has still fallen from 1.6% of GDP to 1.2% – it was 4.8% in Q1FY14.
Perhaps the single-biggest reason for this is the collapse in the price of oil. Between FY14 and FY15, as a result of this, while oil imports collapsed from $164 bn to $138 bn, exports fell from $63 bn to $57 bn, or a net gain of $20 bn. Just that difference would have made the CAD rise by around 1% of GDP, a figure which would have made India’s macros look a lot less attractive considering the sharp fall in non-oil exports in the last year. A high crude price, in turn, would have pressured both inflation as well as the fiscal deficit. In the case of gold, the real difference can be seen over a two-year period – imports fell from $16.5bn in Q1FY14 to $7.1bn in Q1FY15 and rose slightly to $7.5bn in Q1FY16, or from 3.6% of GDP in Q1FY14 to 1.5% of GDP in both FY15 and FY16 – once again, the collapse in global gold prices is a matter of luck, not the result of the Indian government’s policy.
Everyone has seen the chart of “Total Credit Market Instruments“, which as of its most recent update on March 31, 2015, was just over $59 trillion, or 330% of US GDP.
For those who have not seen it, as well as for those who are familiar with this chart, take a long look, because this is the last update of this particular data series, pulled straight from the Fed’s Z.1 Flow of Funds (section L.1), you will ever see.
So did the Fed spontaneously terminate the reporting of what until the second quarter’s update of the Flow of Funds, was the most comprehensive official summary of Household, Financial, Corporate and Government debt in existence? And if so why?
Many Fed watchers assumed that this is precisely what happened, and indeed, searching high and low for the infamous L.1 Section revealed nothing.
We can only assume that the vocal outcry that emerged in the aftermath of the Fed’s release of its Q2 Flow of Funds statement missing this most critical of data sets on September 18, was so loud that three weeks later, this past Friday on October 9, the Fed released an official follow up explanation what exactly happened.
The question of when to apply this thumping description to the unravelling of EM fortunes is more than academic. The word “crisis” has a way of fixing perceptions among investors, executives and policymakers while displacing nuance from analysis.
But the word is starting to surface. Dominic Rossi, global chief investment officer at Fidelity Worldwide Investment, which invests $290bn for its clients, referred to an “emerging market crisis” in the Financial Times. Also last week, the Institute of International Finance (IIF), an influential industry association, issued a report saying the fall in EM equities and currencies has “reached crisis proportions”.
Other analysts demur, while even some of those who use the description are keen to qualify it. The big difference, they say, between the current bout of EM frailty and the “Asian crisis” in the late 1990s — the last economic meltdown to originate in the developing world — is that this episode has evolved over many months, whereas the Asian crisis was an eruptive shock.
“In medical terms, the patient’s condition is chronic, not acute,” said David Lubin, head of emerging market economics at Citi. “EM has a persistent problem that results from two irreversible shocks. One is the end of an era which saw rapid, investment-led growth in China. And, two, the collapse of global trade growth to levels unseen for a generation,” he added.
The value of unsold apartments across the top seven cities of the country at the end of June has been estimated at a whopping Rs 4 lakh crore, with few signs the inventory will be cleared anytime in the next four years. At 7.5 lakh, the number of flats in the mid-priced range is virtually the same as it was at the end of March, this year, which means sales have come to a standstill.
In addition, there are 50,000 luxury apartments, priced at an estimated Rs 1 lakh crore, lying unsold in Mumbai alone. “Developers are now reducing the sizes of the apartments to make them more affordable,” Sandeep Runwal, director, Runwal Group, told FE.
Indeed, industry experts opine it could take as long as five years before builders are able to offload such a large number of units. Despite the large number of flats going abegging, however, some 37,000 flats in the mid-priced segment were launched in the three months to June, roughly half the number opened up for buyers in the March quarter, data from PropEquity shows. Mudassir Zaidi, national director, Knight Frank, says builders have realised there is little point in launching new properties since that would only pressure prices further. “The pace of recovery in housing sales is far slower than earlier anticipated and the high inventory is not coming down in a hurry,” Zaidi observed.
India ranks among the top five sovereign debt issuers from the emerging economies after China, said Moody’s Investors Service.
“The top five largest sovereign EM (emerging market) debt issuers, as of end-2014, were China (with $3.5 trillion total sovereign debt outstanding), India ($1.3 trillion), Brazil ($1.2 trillion), Mexico ($387.5 billion) and Turkey ($265.5 billion),” it said in a report.
Compared to debt volumes as of end-2000, China has overtaken India and Brazil as the largest debt issuer in 2014, it said.
EM sovereign debt outstanding has grown almost five times between 2000 and 2014.
The report further said that the vast majority of new issuance by emerging market governments or central banks has been directed to debt denominated in local currencies.
“…while EM foreign currency denominated debt grew one and a half times (from $0.9 trillion in 2000 to $1.2 trillion in 2014), EM local currency debt grew more than six-fold (from $1.4 trillion in 2000 to $8.7 trillion in 2014),” it said.