Let us head over and see the comex results for today.

Last night:  China devalues

What China was supposed to do over the weekend, and waited until its stock market tumbled another 16%, it has just done, because as MarketNews, Reuters and Bloomberg all just blasted, moments ago the PBOC cut both the benchmark and RRR rates:

• CHINA PBOC CUTS INTEREST RATES
• CHINA PBOC CUTS REQUIRED DEPOSIT RESERVE RATIO
• CHINA PBOC CUTS 1Y DEPOSIT RATE BY 25 BPS
• CHINA PBOC CUTS 1Y LENDING RATE BY 25 BPS
• CHINA PBOC CUTS BANKS DEPOSIT RESERVE RATIO BY 50 BPS
• CHINA PBOC: OVERALL PRICE LEVEL STILL LOW DESPITE PORK PRICE
• CHINA PBOC: GLOBAL FINANCIAL MKT SEES BIG VOLATILITY
• CHINA PBOC: ECO STILL FACING DOWNWARD PRESSURE
• CHINA PBOC LIFTS CEILING ON DEPOSIT INTEREST RATES

From the PBOC:

People’s Bank of China, from August 26, 2015, down financial institutions RMB benchmark lending and deposit interest rates in order to further reduce financing costs. Among them, one-year benchmark lending rate by 0.25 percentage point to 4.6%; year benchmark deposit rate by 0.25 percentage point to 1.75%; all other grades of loans and deposit benchmark interest rate, adjusted individual housing provident fund deposit and lending rates. Meanwhile, the release of more than one year (excluding one year) fixed deposit interest rate floating ceiling, demand deposits and time deposits of one year or less floating interest rate ceiling unchanged.

 

Since September 6, 2015, down financial institutions RMB deposit reserve ratio by 0.5 percentage points, in order to maintain reasonably adequate liquidity in the banking system, guide steady moderate growth of money and credit. Meanwhile, to further enhance the financial institutions to support the “three rural” and the ability of small and micro enterprises, additional lower county rural commercial banks, rural cooperative banks, rural credit cooperatives and rural banks and other rural financial institutions reserve ratio by 0.5 percentage points. Additional reduction of financial leasing companies and auto finance companies reserve ratio three percentage points, to encourage it to play a good role in the expansion of consumption.

This move takes the RRR from 18.50% to 18.00%, the deposit rate from 2.00% to 1.75%, the lending rate from 4.85% to 4.60%, and the PBOC also announced a further 300 bps RRR cut for financial leasing and auto leasing companies.

Here is the initial take from the WSJ:

China on Tuesday cut interest rates by one-quarter of a percentage point and reduced bank-reserve requirements by half of a percentage point amid market turmoil.

 

China also did away with its ceiling on most bank deposits.

 

The People’s Bank of China said in a statement on its website that it also cut bank reserve requirements for rural banks by an additional half a percentage point.

 

The interest-rate cut is effective Wednesday, while the reserve-requirement reduction is effective Sept. 6. The rate cut is the fifth by the Chinese central bank since November, while the reserve-requirement cut for all banks is the third this year.

 

The moves came after China’s stock-market slumped again amid worries over a slowdown in growth. Its main stock index fell 7.6% on Tuesday after an 8.5% fall on Monday, bringing it down more than 20% over four trading days.

This is what the PBOC said in connection to the rate cut (google translated):

1. what the introduction of the combination of measures to cut interest rates drop quasi major consideration is?

A: At present, China’s economic growth is still downward pressure, steady growth, adjusting structure, promoting reform, benefit people’s livelihood and risk prevention task is still very arduous, global financial markets recently greater volatility, the need for more flexible use of monetary policy tools to create a favorable environment for monetary and financial adjustment of economic structure and stable and healthy economic development.

The lower the benchmark interest rate loans and deposits, the main purpose is to continue to play a guiding role good benchmark interest rate, help lower the cost of financing community to support the sustainable and healthy development of the real economy. Since November 2014, the PBC has four lowered the benchmark interest rate loans and deposits, guide financial institutions lending rates continued to decline. July 2015, the weighted average interest rate of loans from financial institutions was 5.97%, the first decline since 2011 to the level of financing high social cost below 6% effective mitigation. Although the past two months, CPI rose slightly, but the main impact of structural factors such as rising pork prices are significantly affected, the overall price level is still at historically low levels, but also for the re-use price tools to further contribute to the reduction of social financing the cost of providing the conditions. To this end, the approval of the State Council, the People’s Bank of China decided to further cut the benchmark interest rate loans and deposits, lending rates of financial institutions and to promote all kinds of market interest rates continue downward, to consolidate the macro-control policy effects preliminary.

The lower the deposit reserve ratio, mainly based on changes in the banking system liquidity, adequate long-term liquidity, in order to maintain adequate liquidity and reasonable, and promote stable and healthy economic development. People’s Bank recently improved the exchange rate of the RMB against the US dollar quotation mechanism, and spreads over the central parity and the market exchange rate correction, reaching equilibrium in the foreign exchange market in the process, can cause fluctuations in liquidity, requiring remedy the resulting liquidity gap and reduce the deposit reserve ratio may play such a role. In addition, the county additionally reduce rural commercial banks, rural cooperative banks, rural credit cooperatives, rural banks and financial leasing companies, auto finance companies RRR, related primarily to guide financial institutions to further increase the “three rural “Small and micro enterprises and the expansion of consumer support.

2, the combination of interest rate cuts open the background and significance of what one-year deposit rate over the floating ceiling is? Why should we continue to keep the upper limit of the floating interest rate deposits and demand deposits within the same year?

A: According to the State Council’s strategic plan, in recent years, the People’s Bank to accelerate market-oriented interest rate reform, and made important progress. Currently, in addition to the deposit interest rate controls have been fully liberalized, the deposit rate floating ceiling has been expanded to 1.5 times the benchmark interest rate for businesses and individuals formal certificates of deposit issued, the market interest rate pricing mechanism and continuously improve self-discipline, the central bank interest rate management capacity to gradually enhance the smooth introduction of the deposit insurance system, further promote market-oriented reform of interest rate conditions are more mature. Meanwhile, the current overall price level in China is low, the total amount of ample liquidity in the banking system, relatively small upward pressure on market interest rates, but also to promote market-oriented interest rate reform to provide a better macroeconomic environment and the time window.

In this case, put the reform in regulation with a combination of interest rate cuts and further promote the interest rate market-oriented reforms, open the one-year deposit interest rate floating above the upper limit of interest rate reform marks another important step forward. As financial institutions to further expand the independent pricing space, is conducive to the promotion of independent pricing capability of financial institutions to improve and accelerate the transformation of the business model, improve financial services, but also help promote the fund price more realistically reflect the market supply and demand, give full play to the market decisive action, and further optimize the allocation of resources, promoting economic structure adjustment and transformation and upgrading, create favorable conditions for healthy and sustainable economic and financial development.

Remain within the one-year deposit and deposit interest rate floating ceiling unchanged, reflecting the “first long-term, short-term,” the basic order of progressive liberalization of deposit interest rate ceiling of reform ideas, but also with international practice consistent. Judging from past experience, this order to promote market-oriented interest rate reform, help foster and exercise independent pricing capability of financial institutions, to lay a more solid foundation for the full realization of the final interest rate market; but also conducive to the stability of financial institutions deposit interest rate and overall financing costs, contribute to the reduction of social financing costs, for the sustained and healthy economic development has a positive meaning.

3, release the one-year deposit rate over the floating cap, how to guide scientific and rational pricing of financial institutions?

A: The release of more than a year after the floating deposit rate cap, the PBC will continue to improve related measures, further scientific and rational pricing guide financial institutions to maintain a fair and orderly market competition order. First, we continue to publish benchmark deposit rate by existing maturities. Further play the guiding role of the benchmark rate, providing an important reference for the one-year deposit rate over pricing. Second is to improve the regulation of interest rates and the transmission mechanism. Further improve the central bank interest rate management system, enhance the ability to control interest rates. Strengthen financial market benchmark interest rate to cultivate and improve the market interest rate system, improving monetary policy transmission. Third is to play the role of industry self-regulation. Guide market interest rate pricing discipline mechanism to further play an important role in a good industry pricing discipline, in accordance with the principles of compliance with laws and regulations, incentives and constraints of both, for a better interest rate pricing financial institutions continue to give priority to give more power market pricing and product innovation, expand the main issue certificates of deposit and interbank deposit investment range; with the necessary self-restraint on deposit interest rates beyond a reasonable level, disrupt the market order financial institutions.

4. recent central bank action to provide liquidity What?

A: The central bank to provide liquidity more channels and tools, in addition to the RRR, the recent expansion of the central bank has also implemented a reverse repo, the medium-term lending to facilitate (MLF), supplementary mortgage loans (PSL) and so increase market liquidity and loanable funds initiatives. Since August, the cumulative carry out reverse repo operations put in 565 billion yuan of liquidity to carry out the central treasury cash management deposits at commercial banks operating liquidity put 60 billion yuan. August 19 six-month period to carry out MLF operating 110 billion yuan, 3.35% interest rate, at the same time increase market liquidity and guide financial institutions to increase small and micro enterprises and the “three rural” and other key areas of the national economy and weak links support. Continue to provide long-term stability, adequate sources of funding for the development costs of the financial support shed change by PSL, 7 PSL amounted to 846.4 billion yuan at the end, an increase of 463.3 billion yuan over the beginning. The timely play of price leverage, as well as adjustments to adapt keep the benchmark lending rate, since the funds rate three times this year cut PSL to increase the shantytowns, support, promote lower financing costs. In addition, the central bank continues through agriculture, support small refinancing and rediscount support financial institutions to increase the “three rural” small and micro enterprises credit. The end of July, the balance of agriculture lending 213.9 billion yuan, an increase of 26.2 billion yuan over the previous year; supporting small balance lending 62.5 billion yuan, an increase of 25.4 billion yuan over the previous year; rediscount balance of 127.2 billion yuan over the previous year increased 11.8 billion yuan.

Next, the central bank will continue to closely monitor changes in liquidity, comprehensive use of various instruments properly adjusted combinations of liquidity, to maintain adequate liquidity and reasonable and stable operation of the money market, to guide steady moderate growth of money and credit, and promote stable and healthy economic development.

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Zero hedge explains the futile attempt by the POBC trying to rescue its stock market:

(courtesy zero hedge)

With Stocks In Free Fall, China Ditches Plunge Protection For Desperation Rate Cuts

Over the weekend, the PBoC was radio silent on a highly anticipated RRR cut and the results, to say the least, were not favorable.

Gulf markets set the tone on Sunday and then from the word “go” in Shanghai on Monday morning until, well, until now, it’s been unabated selling. Selling which spilled over onto Wall Street yesterday and left the Dow down nearly 600 points at the close. 

With Chinese stocks still reeling, we got a dual policy rate cut out of the PBoC first thing this morning which is interesting considering that, as Bloomberg reports, the plunge protection national team operating through China Securities Finance has apparently given up on trying to support stocks directly. Here’s whatBloomberg said earlier today:

China has halted intervention in the stock market so far this week as policy makers debate the merits of an unprecedented government campaign to prop up share prices, according to people familiar with the situation.

 

Some officials argue that falling stocks will have a limited impact on the world’s second-largest economy and that the costs of supporting the market are too high, said one of the people, who asked not to be identified because the deliberations are private. Officials who back intervention say tumbling shares pose a risk to the banking system, the people said.

 

The Shanghai Composite Index sank 15 percent over the past two days, extending a $4.5 trillion rout since mid-June that has shaken confidence among equity investors around the world. President Xi Jinping’s government is trying to balance a pledge to loosen its grip on markets against the need to maintain financial stability amid projections for the weakest economic expansion since 1990.

“From now on, the CSRC has abandoned the idea of protecting an index level – maybe it’s a sign of maturity,” one source reportedly told Caixan. “Analysts believe this episode marks the end of Beijing’s attempts to directly manage the level of the Shanghai Composite Index. Monday’s action has shattered any illusions about the government’s appetite for direct intervention,” MNI adds.

And a bit more from Bloomberg:

“Government intervention has dropped substantially,” Michelle Leung, the chief executive officer at Xingtai Capital in Hong Kong, said in e-mailed comments on Tuesday. “The reform-minded camp within the government that favors letting the market do its work seems to be driving decision making right now.”

Or perhaps not, as indicated by Tuesday morning’s desperation rate cuts.

It appears as though, on the heels of comments the CRCS made earlier this month which indicated that, although the plunge protection team would linger in the background “for years,” intervention would only come during times of extreme dislocations and stress, and while one might well be able to argue that Monday and Tuesday most certainly qualify, the global attention that China’s CNY900 in billion direct interventions have garnered looks to have left the CSF feeling gun shy. 

So what’s a central planner to do?

Well, if you’re Beijing, one thing you can try is a simultaneous policy rate cut, which is exactly what we got on Tuesday morning.

Part of the aim is quite obviously to free up liquidity, which has suffered in the wake of China’s frequent open FX ops. We got still more evidence of the liquidity shortage last night when the PBoC decided to conduct CNY150 billion in reverse repos. Just last week we remarked on the extraordinary effort to inject cash via a CNY120 billion reverse repo and another CNY110 billion via medium term lending facilities (which, incidentally, the PBoC indicated it is looking to use again earlier today).

But the PBoC likely hopes it can kill two birds with two stones (to adapt the analogy). That is, by bundling a lending rate cut with the RRR cut (which the PBoC also did in June), the central bank may be trying to send a forceful message to the stock market while freeing up liquidity at the same time.

If the market gets the message (or perhaps “takes the bait” is the better way to put it), investors will take solace in the move, Chinese stocks will find their footing, and the CSF can quietly fade into the background for a while. That way, should the meltdown begin anew down the road, China can intervene directly with the national team and point to the fact that it hasn’t done so in quite some time.

So in short, the dual policy rate cut looks to be an effort to i) free up liquidity being sucked out by China’s FX interventions to support the yuan, and ii) shore up confidence in the stock market without resorting to direct purchases of equities on the part of CSF. 

We suspect the effects may be short lived on both accounts because after all, aggressive easing only fuels further depreciation necessitating further liquidity-sapping FX interventions in a vicious loop (as Commerzbank’s Hao Zhou put it this morning, “the side effect of monetary easing is the depreciation pressure on CNY”), and loose monetary policy likely won’t be much comfort to China’s 90 million retail investors who now, more than ever before, are virtually guaranteed to sell any rip they can get in a desperate attempt to claw back their life savings which they naively poured into stocks back in April and May.

Why Did China Just Cut Rates, Again: Here Are Goldman’s Three Reasons

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the real reason that China cut its RRR: the unlocking of the rate cut provided 106 billion equivalent of yuan into the market i.e. badly needed liquidity.  The POBC has spent huge amounts of money stabilizing the yuan and they needed the rate cut as a counterbalancing tool.  It had nothing to do with the market fall these past few days:

(courtesy zero hedge/Soc Gen)

The Most Surprising Thing About China’s RRR Cut

Following China’s 50bps RRR cut this morning, coupled with a 25 bps easing in deposit and lending rates, there have been numerous strategist reactions, most of which suggesting what the PBOC did was in response to China’s crashing stock market and slowing economy. But mostly the market, and not so much China’s perhaps as that of Europe: moments ago Eurostoxx closed up a whopping 5.0% with the Dax soaring 5.32%. As a reminder, the German stock market has been the most punished among western bourses due to concerns trade with China will deteriorate leading to a drop in German exporter revenue and profitability.

And yet, hours before the RRR announcement, a Bloomberg note came citing “people familiar with situation ” which said that China halts intervention in stock market so far this week as policy makers debate merits of an unprecedented government campaign to prop up share prices and what to do next. The note added that some leaders support argument that stock market is too small relative to broader economy to cause crisis, adding that “leaders also believe intervention is too costly.”

So how does one reconcile China’s reported detachment from manipulating the stock market having failed to prop it up with the interest rate cut announcement this morning.

The missing piece to the puzzle came from a report by SocGen’s Wai Yao, who first summarized the total liquidity addition impact from today’s rate cut as follows “the total amount of liquidity injected will be close to CNY700bn, or $106bn based on today’s onshore exchange rate.” And then she explained just why the PBOC was desperate to unlock this amount of liquidity: it had nothing to do with either the stock market, nor the economy, and everything to do with the PBOC’s decision from two weeks ago to devalue the Yuan. To wit:

In perspective, the PBoC may have sold more official FX reserves than this amount since the currency regime change on 11 August.

And there is the punchline. It explains why the PBOC did not cut rates over the weekend as everyone expected, which resulted in a combined 16% market rout on Monday and Tuesday – after all, the PBOC understands very well what the trade off to waiting was, and it still delayed until today by which point the carnage in local stocks was too much. Great enough in fact for China to not have eased if stabilizing the market was not a key consideration.

In other words, today’s RRR cut has little to do with net easing considerations, with the market, or the economy, and everything to do with a China which is suddenly dumping a record amount of reserves as it scrambles to stabilize the Yuan, only this time in the open market!

 

The battle to stabilise the currency has had a significant tightening effect on domestic liquidity conditions. It is the PBoC’s decision whether or not to keep at it. If the PBoC wants to stabilise currency expectations for good, there are only two ways to achieve this: complete FX flexibility or zero FX flexibility. At present, the latter is also increasingly unviable, since the capital account is much more open. Therefore, the PBoC has merely to keep selling FX reserves until it lets go.

And since it can’t let go now that it has started off on this path, or rather it can but only if it pulls a Swiss National Bank and admit FX intervention defeat, the one place where the PBOC can find the required funding to continue the FX war is via such moves as RRR cuts.

SocGen makes some other key observations:

Based on our calculations, the effective RRR rate of the Chinese banking system is actually below 15%, rather than the reported headline of 18% (include the cut today). If the PBoC were to reduce the RRR quickly to a minimum level, say 5% effectively, the amount of the liquidity injection would be over CNY13tn or $2tn, which should be large enough scope for FX intervention.

It should, unless the escalation from all the other countries that have also seen their currencies tumble in value is not proportional enough to require constant intervention by China.

A question arises: just what is China selling. SocGen has an answer for that as well:

From an operational perspective, China’s FX reserves are estimated to be two-thirds made up of relatively liquid assets. According to TIC data, China held $1,271bn US treasuries end-June 2015, but treasury bills and notes accounted for only $3.1bn.The currency composition is said to be similar to the IMF’s COFER data: 2/3 USD, 1/5 EUR and 5% each of GBP and JPY. Given that EUR and JPY depreciation contributed the most to the RMB’s NEER appreciation in the past year, it is plausible that the PBoC may not limit its intervention to selling only USD-denominated assets.

SocGen’s conclusion: “In a nutshell, the PBoC’s war chest is sizeable no doubt, but not unlimited. It is not a good idea to keep at this battle of currency stabilisation for too long.”

Still, for the time being many more such RRR-cuts (and other interim reliquifications) are imminent if only for the duration of China’s FX war, with the critical distinction that the proceeds will not reach the banks, nor the economy, but remain locked in within the PBOC’s FX devaluation machinery!

Since the RRR cut is for reversing liquidity tightening and the rate cut is diluted by liberalisation, we need to monitor the development of onshore interbank rates in the coming weeks to assess whether the PBoC’s move today would amount to any net easing. It seems to us that 7-day repo rate at 2.5% is a critical line. If this rate drops below that level and remains low, then we can say with more confidence that there is monetary policy easing. If not, then more, a lot more, needs to be done.

And there you have it: while global markets received China’s announcement with their typical “a central bank just came to our reascue” exuberance, the reality is that as least today’s RRR cut will have zero impact on spurring aggregate demand, and is merely a delayed response to FX interventions that have already taken place.

Said otherwise, for China to net ease, it will have to do more, much more.

Ironically, doing so, will merely accelerate the capital outflows as a result of the ongoing plunge in the CNY, which leads to the circular logic of China’s intervention: the more it intervenes in an attempt to stabilize every aspect of its economy and finance, the more it will have to intervene, until either it wins, or something snaps.

Our money is on the latter.

end

Expect another rout tonight from China especially after the huge reversal of the Dow today:

(courtesy zero hedge)

This Could Be Bad News Ahead Of China’s Open Tonight

Earlier today we explained why far from supporting the stock market, all the Chinese RRR cut did was offset already used funds to support currency intervention following the August 11 devaluation: the one sentence from SocGen that put it in perspective was tthe following: “In perspective, the PBoC may have sold more official FX reserves than this amount since the currency regime change on 11 August.”

Hence, the RRR cut was a retroactive move, not at all proactive as the market’s initial euphoria indicated.

Which, ahead of China’s close tonight, could be very bad news for those hoping for a rebound in China’s Shanghai Composite which as a reminder closed below 3000 for the first time since its bubble runup which started last July.

Here, according to Bloomberg, is the reason why:

China halts intervention in stock market so far this week as policy makers debate merits of an unprecedented government campaign to prop up share prices and what to do next, according to people familiar with situation.

 

Some leaders support argument that stock market is too small relative to broader economy to cause crisis, says one of the people, who asked not to be identified as deliberations are private

 

Leaders also believe intervention is too costly, person says.

 

Those who back intervention argue that market meltdown could pose danger because banks offer wealth-management products tied to market performance, people say

 

Government’s current priority is success of military parade set for Sept. 3 in Beijing commemorating end of World War II, people say

 

China Securities Regulatory Commission doesn’t immediately respond to faxed request for comment

So if the liquidity from the RRR had been already used up, and if China will not step in to prop up stocks, what will? And why is China doing this? The FT had an interestingtheory earlier today:

The China-led turmoil that has rocked global markets in the past two weeks has also shaken the ruling Communist party and left Li Keqiang, the prime minister, fighting for his political future, according to analysts and people familiar with the internal workings of the party.

 

Among party officials and politically connected people in Beijing, the hottest topic of conversation is whether Mr Li will take the fall for Beijing’s perceived mismanagement of the stock market crash and the country’s broader economic slowdown.

 

“Premier Li’s position has certainly become more precarious as a result of the current crisis,” said Willy Lam, an expert on Chinese politics at the Chinese University of Hong Kong. “If the situation worsens and if there comes a point where [President Xi Jinping] really needs a scapegoat, then Li fits the bill.”

 

* * *  

 

Mr Li is already regarded by most analysts and political insiders as the country’s weakest premier in decades, thanks largely to Mr Xi’s aggressive concentration of power in his own hands.

 

* * *

 

“In any other country facing such a big crisis you would see senior officials coming out to reassure the public, but since early July no Chinese political heavyweight has come out to say what’s going on or what the government plans to do about it,” said Mr Lam. “This has fuelled speculation that there are real divisions at the apex of the party.”

Maybe Li rubbed Xi the wrong way, maybe Li just wants to put one of his own people in the premier’s shoes, maybe the two just don’t see eye to eye, whatever the reason, what matters is that Xi now has an “out” from the whole market mess: his prime minister, whom he can hand over to the furious masses to deal with as they see fit, thus washing his hands of the whole Chinese epic stock market bubble pop and moving to bigger and better bubbles.

end

Oh OH!! this does not look good for Saudi Arabia

(courtesy zero hedge)

Over the weekend, just as Gulf state stocks were in full-on meltdown mode, we outlined Saudi Arabia’s increasingly precarious financial situation. The problem – which is at least partially of the kingdom’s own making – can be visualized as follows:

As you can see, Saudi Arabia is staring down a fiscal deficit on the order of some 20% of GDP while the country faces its first current account deficit in over a decade.

The culprit, of course, is persistently low crude prices for which Saudi Arabia can partially blame itself. As we’re fond of putting it, the country has “Plaxico’d” both itself and the petrodollar in an epic quest to bankrupt the US shale space, an effort which has been complicated by US drillers’ access to capital markets which are of course quite forgiving thanks to years of ZIRP.

Now, with declining crude revenues clashing head on with the cost of simultaneously financing the state while intervening militarily in Yemen, the Saudis are looking to tap the bond market (a move which could increase debt-to-GDP by a factor of 10 by the end of next year) and some are speculating that the riyal’s dollar peg could ultimately prove unsustainable. 

So that is the backdrop and as Bloomberg reports, it’s forcing the Saudis to consider ways to cut the critical 2016 budget. Here’s the story:

Saudi Arabia is seeking to cut billions of dollars from next year’s budget because of the slump in crude prices, according to two people familiar with the matter.

 

The government is working with advisers on a review of capital spending plans and may delay or shrink some infrastructure projects to save money, the people said, asking not to be identified as the information is private. The government is in the early stages of the review and could look at cutting investment spending, estimated to be about 382 billion riyals ($102 billion) this year, by about 10 percent or more, the people said. Current spending on areas such as public sector salaries wouldn’t be affected, the people said.

 

The Arab world’s largest economy is expected to post a budget deficit of almost 20 percent of gross domestic product this year, according to the International Monetary Fund. With income from oil accounting for about 90 percent of revenue, a more than 50 percent drop in prices in the past 12 months has put pressure on the nation’s finances. The country has raised at least 35 billion riyals from local bond markets this year, the first time it has issued securities with a maturity of over 12 months since 2007.

 

Capital investment accounts for less than half the government’s outgoings, with current spending estimated at 854 billion riyals, according to a report issued by Samba Financial Group on Aug. 18. Saudi Arabia needs “comprehensive energy price reforms, firm control of the public sector wage bill, greater efficiency in public sector investment,” the IMF said this month. “The sharp drop in oil revenues and continued expenditure growth would result in a very large fiscal deficit this year and over the medium term, eroding the fiscal buffers built up over the past decade.”

 

The Ministry of Finance declined to comment.

So while we’re not sure if the Saudis are open to taking advice from outside their circle of “advisers”, we offer the following observations free of charge:

• deliberately undermining a system that has worked to your benefit for years (and helped create a vast store of FX reserves) in a spiteful attempt to undercut high cost producers an ocean away might not have been the best idea
• using crude prices to achieve “ancillary diplomatic benefits” (to quote The New York Times) like forcing the Kremlin to give up Assad, is now costing a whole lot of money
• getting involved in regional proxy wars is expensive

*  *  *

Bonus: this is what a dual deficit problem looks like

And now onto one of our next basket cases:   Brazil

Two commentaries

(courtesy zero hedge)