After issuing record debt in 2020, Gulf countries will likely borrow less this year

Men walk past a closed restaurant in the Saudi capital Riyadh, on February 5, 2021.
Fayez Nureldine | AFP | Getty Images

Gulf nations issued a record amount of debt last year but will not have to borrow as much in 2021, according to analysts who spoke to CNBC.
That’s because the fiscal positions for countries in the Gulf Cooperation Council, or GCC, have likely improved thanks to a recovery in oil prices and as the regional economy bounces back from the pandemic’s fallout, they said.

“2020 was an exceptional year,” Trevor Cullinan, lead analyst of GCC sovereign ratings at S&P Global Ratings, told CNBC in February.
“Going forward, we don’t think that there will be the same need as in 2020,” he said. “We broadly expect fiscal consolidation over 2021 to 2023 — we think the deficits will be smaller, (and) economic activity will be stronger.”

Record levels of debt issued

Bond issuances by Gulf countries rose significantly in 2020.
According to data from Capital Economics, the total international debt issued by Saudi Arabia, the United Arab Emirates, Qatar, Bahrain and Oman was $42.1 billion last year. That’s up 25% from $33.5 billion in 2019.

Arrows pointing outwards

“The amount reached a record high, driven by higher deficit financing needs resulting from the slump in oil prices and the impact of Covid-19,” said Scott Livermore, chief economist of Oxford Economics Middle East.

But oil prices have been climbing up due to a harsh winter in the U.S. as well as an improving global economic outlook.
Those factors provide a “welcome reprieve” to Gulf budgets, said Livermore.

Benefits of turning to the bond market

Still, the need for borrowing remains, and countries in the region will continue to issue bonds in 2021.
Saudi Arabia has already raised $5 billion this year, and reportedly hired banks in preparation for a euro-denominated bond sale.
“Governments in the Gulf are still likely to favor international bond issuance over other forms of financing for the time being,” according to James Swanston, a Middle East and North Africa economist at Capital Economics.
He said that dollar revenue can plug both the budget deficit and current account shortfall, and help the government better defend their dollar pegs without tapping on foreign exchange reserves.
Leaning on international markets also means local banks don’t have to buy up sovereign bonds, he said.
Livermore pointed out that borrowing costs are low, and governments in the region can issue bonds to fund diversification programs.
“Countries may also choose to come to (the) market to refinance maturing debt if sentiment remains favorable,” he added.

Effects of taking on debt

Sovereign debt levels in the Gulf are relatively low, said Livermore.
“If the rollover risk is effectively managed through refinancing, then GCC governments should be able to navigate through the short term,” he said.
Capital’s Swanston agreed that higher debt-to-GDP ratios in the region generally do not pose a “major risk,” though he is concerned about Oman and Bahrain. Debt-to-GDP ratio is a measure of a country’s ability to pay back public debt — a high ratio may be an indication that a country could find it harder to pay off its external debts.

Government debt ratios in the two countries have “risen sharply” in recent years, Swanston said.
Both states have tightened fiscal policy to address public finances, he added. “But, some period of prolonged austerity will be needed to keep deficits and the public debt in check.”
Bahrain’s government debt-to-GDP ratio is expected to hit 115% this year, while Oman’s is predicted to reach 84%, according to data from S&P Global Ratings.
— CNBC’s Thomas Franck and Eustance Huang contributed to this report.

Op-ed: A digital dollar would help the U.S. and its allies keep China in check

Chinese officials have made no secret that their greatly accelerated efforts at introducing and distributing the digital yuan are an opening move in their long-term strategy to undermine the dollar’s global supremacy and expand their influence.
Despite that, leading U.S. financial officials have rolled their eyes at any suggestion that deeper dangers lurk for the dollar, and thus also for U.S. national security, in the global digital currency race. Even as China marches forward and bitcoin’s value reaches $1 trillion, the Federal Reserve had been in no hurry to be a contestant.

Until now.
This week marked a public turning point for the most significant U.S. government officials engaged in international finance — Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell. Josh Lipsky, director of the Atlantic Council’s GeoEconomic Center, tweeted that it marked “the firing of a starting gun.”
At a New York Times event on Monday with Secretary Yellen, CNBC’s Andrew Ross Sorkin prompted her most full-throated endorsement yet of a digital dollar, or Central Bank Digital Currency, or CBDC. Though Sorkin called Yellen’s attention to an Atlantic Council survey with Harvard’s Belfer Center, showing that 70 countries now have digital currency projects, Yellen’s focus instead was on the domestic good a digital dollar could do Americans.
“I think it makes sense for central banks to be looking at it,” said Yellen, in a historic snippet on snapchat.

“I gather that people at the Federal Reserve Bank of Boston are working with researchers at MIT to study the properties of it. We do have a problem with financial inclusion. Too many Americans really don’t have access to easy payment systems and bank accounts. This is something that a digital dollar, a central bank digital currency, could help with. I think it could result in faster, safer and cheaper payments.”

In congressional testimony a day later, Fed Chair Powell also broke new ground, calling the digital dollar “a high priority project for us.” He added, “We are committed to solving the technology problems, and consulting very broadly with the public and very transparently with all interested constituencies whether we should do this.”
Yet while the Fed consults, China executes.

Neither Yellen nor Powell mentioned China’s growing lead in digital currency development, yet that was the context. Their call-to-action coincides with China’s announcement earlier this month of a significant partnership with the cross-border payment system SWIFT, removing all doubt that Beijing intends to internationalize the digital yuan.
At the same time, China has concluded a free trade agreement, or FTA, with Mauritius, its first with an African state, in a deal that is designed to create a digital financial testing ground. “As China evolves its digital currency plans, it may ultimately be Mauritius that leads in this area for Africa,” write experts Lauren Johnston and Marc Lanteigne for the World Economic Forum. The FTA agrees to promote “the development of a Renminbi clearing and settlement facility in the territory of Mauritius.”
This all comes as Beijing authorities took advantage of Chinese New Year celebrations on Feb. 12 to deploy three large-scale pilot projects to distribute digital yuan worth roughly $1.5 million in “red packets” of about $30 value each. Then this week, China expanded its testing program of digital currency handouts to the city of Chengdu, the capital of Sichuan province and the fifth most populous city in the country, where it is distributing some $6 million in digital yuan.

A digital Chinese currency red packet is seen on a mobile phone in an arranged photograph as Chengdu city starts to distribute 200,000 E-CNY ‘red packets’ worth 40 million yuan on February 24, 2021 in Yichang, Hubei Province of China.
VCG | Visual China Group | Getty Images

China’s ambition appears being to lay the groundwork now for digital yuan’s coming out party at the end of 2022 at the XXIV Olympic Winter Games in Beijing. The speculation is that Chinese organizers might require that all attendees and athletes download an app that would ensure all their payments at the games for hotels, tickets, food, souvenirs, and more are conducted in its new, digital currency. Even if one does not experience a physical boycott of China’s Olympic games, watch for digital boycotts by the U.S. and other teams.     
It is hard not to compare China’s current lead in digital currency development, shrugged off by American officials until now, to its early global lead in developing the 5G, or fifth generation, broadband cellular technology standard. Until the Trump administration responded alongside Western manufacturers, no one could compete with Chinese 5G providers and equipment manufacturers globally, most dominant among them being Huawei.
China’s consistent prioritization of technological advance underscores its recognition that in history the country that has taken the technological high ground in its era has most often also been the dominant international actor.
If the U.S. loses the high ground of financial technological innovation, combined with a weakening of the dollar’s global dominance, the benefits for Beijing would be considerable.

China’s different approach to privacy provides it a competitive advantage. The U.S. and European need to satisfy privacy concerns will complicate CBDC development. Conversely, Beijing sees the digital yuan as a way to further strengthen its already formidable surveillance state, while also improving its ability to combat money-laundering, corruption, and terrorist financing. 
In a newly released paper published by CNAS, authors Yaya J. Fanusie and Emily Jin capture how deeply China understands the geopolitical importance of their digital currency project. They relate how Yao Qian, the former head of the People’s Bank of China’s Digital Currency Research, compared his country’s digital currency progress to previous Chinese advances in robotics, big data, and artificial intelligence.
Speaking before a United Nations information technology conference, “Yao posited digital currency as part of ‘the Next War,'” write the authors, referring to an article of that title in the Economist that discussed technology’s central role in U.S.-China competition.
The Fed worries about being too hasty in introducing a digital dollar, given the stakes as the world’s reserve currency. The greater geopolitical danger, however, is how quickly it is falling behind.
The U.S. can still win this contest if it not only quickly develops a digital dollar, but collaborates on the creation of a digital euro, a digital pound, and a digital yen. The total firepower of these currencies would close the innovation gap quickly.  It would also demonstrate the value of working with allies, a centerpiece of Biden foreign policy.
Frederick Kempe is a best-selling author, prize-winning journalist and president & CEO of the Atlantic Council, one of the United States’ most influential think tanks on global affairs. He worked at The Wall Street Journal for more than 25 years as a foreign correspondent, assistant managing editor and as the longest-serving editor of the paper’s European edition. His latest book – “Berlin 1961: Kennedy, Khrushchev, and the Most Dangerous Place on Earth” – was a New York Times best-seller and has been published in more than a dozen languages. Follow him on Twitter @FredKempe and subscribe here to Inflection Points, his look each Saturday at the past week’s top stories and trends.
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China's aging population is a bigger challenge than its 'one-child' policy, economists say

A medical worker takes care of a newborn baby lying inside an incubator at Jingzhou Maternity & Child Healthcare Hospital on the eve of Chinese New Year, the Year of the Ox, on Feb. 11, 2021 in Jingzhou, Hubei Province of China.
Huang Zhigang | Visual China Group | Getty Images

BEIJING — China’s decades-old one-child policy gained renewed attention in the last few weeks, after authorities gave mixed signals on whether they were closer to abolishing limits on how many children people can have.
Authorities have rolled back the controversial one-child policy in recent years to allow people to have two children. But economists say other changes are needed for boosting growth as births fall and China’s population rapidly ages.

“There are two ways to address this. One way is to relax the birth control, something (that) will help on the margin, but even if they fully relax the control (it’s) probably difficult to reverse the trend,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.
“The other way to deal with it, from an economic policy perspective, is to make industry more dependent on other sectors,” he said.

China’s economy has relied heavily on industries such as manufacturing that require large amounts of cheap labor. But rising wages are making Chinese factories less attractive, while workers will need higher skills to help the country become more innovative.
The bigger problem for China is that an aging population feeds into an existing issue: slower growth in labor productivity, said Alicia Garcia-Herrero, Natixis’ chief economist for Asia-Pacific. She’s watching to see whether China will see more growth in capital-intensive sectors, which is driven more by investment in automation.

Births fall 15% in 2020

China introduced its one-child policy in the late 1970s in an effort to slow a surge in its population. The country had doubled in size from more than 500 million people in the 1940s to over 1 billion by the 1980s, according to official figures.

Over the next 40 years, the population grew by only 40% — to 1.4 billion, more than four times that of the U.S. today.

I don’t think the relaxing of the birth policy could have much of an economic impact because the slow growth in population hasn’t been because of policy restriction, not for the last 20 years.

Dan Wang
chief economist, Hang Seng China.

Similar to other major economies, high housing and educational costs in China have deterred people from having children in recent years.
Despite a change in 2016 allowing families to have two children, births dropped for a fourth-straight year in 2020, and fell by 15% to 10 million, according to analysis of a public security report.
“In general, I don’t think the relaxing of the birth policy could have much of an economic impact because the slow growth in population hasn’t been because of policy restriction, not for the last 20 years,” said Dan Wang, Shanghai-based chief economist at Hang Seng China.
She said based on the experience of other countries, the most effective policy for a country of China’s size would be to welcome more migrants, but that would be an unlikely change in the near term.
Other options policymakers are already pursuing include raising the retirement age, increasing the skills of the existing labor force with more education and using more machines and artificial intelligence to replace human workers, Wang said.

Policy change just a matter of time

The one-child policy gained renewed attention last month when the National Health Commission made public a statement authorizing research into the economic benefits of removing birth restrictions in a northeastern region. The three-province area, known as Dongbei, has struggled economically and has the lowest birth rates in the country.
Two days later, the commission issued another statement saying the news was not a test for full repeal of the family planning policy, despite much online speculation that it was.
But a removal of limits is likely only a matter of time, according to economists interviewed by CNBC.
Yi Fuxian, a critic of the one-child policy and author of the book “Big Country With an Empty Nest,” said he expects a decision at the end of the year, after China releases once-in-a-decade census results in April.

Challenges from China’s aging population

The Chinese government has also said that implementing a strategy for responding to an aging population will be a priority for its next five-year plan, to be officially approved at a parliamentary session that kicks off this week.
Meanwhile, the generations born before the one-child policy was implemented in the 1980s are becoming a significant segment. In the next 10 years, 123.9 million more people will enter the age category of 55 and above, the largest demographic increase among all age ranges, according to Morgan Stanley.
This demographic shift will create its own economic demands, said Liu Xiangdong, deputy director of the economic research department at the China Center for International Economic Exchanges based in Beijing.
Liu said more workers will be needed to care for the elderly, while retirement communities and other infrastructure tailored to an older population will see greater demand.

Dow futures rise more than 200 points as Treasury yields fall

A woman walks past the New York Stock Exchange (NYSE) at Wall Street on January 12, 2021 in New York City.
ANGELA WEISS | AFP | Getty Images

U.S. stock futures rose sharply in overnight trading on Sunday, as Treasury yields continued to retreat from their highs from last week.
Dow futures rose 240 points. S&P 500 futures gained 0.88% and Nasdaq 100 futures rose 1.18%.

The 10-year Treasury yield dipped slightly to 1.4%. Prices move inversely to yields.
Boosting sentiment on the vaccine front, the Centers for Disease Control and Prevention advisory panel voted unanimously Sunday to recommend the use of Johnson & Johnson’s one-shot Covid-19 vaccine for people 18 years of age and older. The company expects to ship out 4 millions of doses initially.
Last week, stocks were pressured by rising interest rates. Higher interest rates can threaten the dominance of equities, as bonds are viewed as less risky. The yield on the benchmark 10-year got as high as 1.6% on Thursday but retreated to around 1.41% on Friday.
The Dow Jones Industrial Average and S&P 500 lost and 1.7% and 2.5%, respectively, between Monday and Friday.
The technology-heavy Nasdaq Composite dropped more than 4% for the week, suffering its worst one-day sell-off since October on Thursday. Technology companies rely on being able to borrow money for a low rate in order to invest in future growth.

“Bond market volatility surged to its highest level since April and until some calm and some new peak level of yields is found, this well be the key focus for investors,” Jim Paulsen, The Leuthold Group chief investment strategist, told CNBC.
The major averages rose for the month of February, bolstered by a strong earnings season, positive news on the vaccine rollout and hopes of anther stimulus package.
The House passed a $1.9 trillion Covid relief bill, the American Rescue Plan Act of 2021, early Saturday. The Senate will now consider the legislation. 
The Dow gained 3.15% for its third positive month in four in February. The S&P 500 gained 2.61% and the Nasdaq Composite gained nearly 1% for its fourth positive month in a row.
February’s final read for Markit’s U.S. manufacturing purchasing managers’ index for February comes out on Monday at 9:45 a.m. ET. Economists polled by Dow Jones are expecting a read of 58.5, the same as December’s read of 58.5.
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