Thursday 15 November 2018

Jean-Michel Saliba

Macro outlook bullish for 2018: BofA Merrill Lynch

DUBAI, December 7, 2017

BofA Merrill Lynch Global Research has issued a bullish macro outlook for 2018, calling for robust global economic growth, steady US expansion and solid stock returns that peak in the first half of the year.

However, it warns of signs that the long bull market run is nearing the end of its leash, triggering a mid-year pullback alongside potential for some of the best returns in the last gasps of the cycle.

The Research team forecasts modest returns in equities and credit, negative bond returns, a stronger dollar, higher levels of volatility and tighter credit spreads in 2018. Inflation is expected to be the big story of the year, particularly in the US, where the labour market is expected to further tighten and inflation pressures are building. Passage of US tax reform is the main upside risk to economic growth, with far-reaching effects, particularly for emerging markets, that have not been fully priced into the market.

 “Our overall outlook for the year ahead is macro bullish, so much so that we’re ultimately market bearish,” said Michael Hartnett, head of Global Investment Strategy, BofA Merrill Lynch Global Research.

“Investors are chasing growth and high-yielding assets in a bull market that’s been driven and enabled by central bank liquidity. We see an end to this Icarus trade and an aggressive downgrade of risk assets once profits peak, investor positioning becomes excessively enthusiastic and central banks start withdrawing liquidity as they scale back support.”

Regional highlights

Saudi Arabia - Higher oil, higher uncertainty

While oil prices have moved higher in the past, Saudi Arabia faces a mix of uncertainties: 1) policy-making; and, 2) anti-corruption probe. If resolved successfully, coupled with higher oil prices, this could lead to higher medium-term growth potential and economic growth finding a bottom this year. Oil prices are likely to be a determinant of the success of the reform programme. At oil prices of $40/bbl, announced fiscal reforms are insufficient to safeguard macroeconomic stability. The $40-50/bbl range for oil prices is a grey zone. We draw more comfort in the success of fiscal reforms at $60/bbl, assuming no changes in the programme.

Focus shifts to growth

The government appears intent on supporting the economy through 1) a more gradual phasing of fiscal reforms; 2) introduction of Household Allowance and Private Sector Support programmes; 3) introduction of structural reforms such as women driving and the build-up of an entertainment industry; and, 4) the launch of infrastructure projects led by the Public Investment Fund (PIF) such as the $500 billion NEOM special zone. Medium-term growth potential could increase by 2 percentage points (ppt) on the back of structural reforms.

2018 budget key to cyclical outlook

Announcement is expected in late December. At $60/bbl, authorities face a choice: save 3 per cent of GDP in windfall, or spend it and boost non-oil real GDP by 0.5ppt. Further spending could raise the fiscal breakeven oil price and make it stickier, exposing the budget to oil price volatility.

“Higher oil prices will cut external financing requirements, as we estimate every $10/bbl increase in oil prices translates to $5-7.5 billion in lower annual external borrowing requirements. The extension of the fiscal balance target programme to 2023 would negate this effect to some extent as international bond redemptions kick in over 2020-2023 ($3-5.5 billion maturing annually),” said Jean-Michel Saliba, Mena Economist at Bank of America Merrill Lynch.

Anti-corruption probe bears watching

The anti-corruption drive could improve accountability and governance, especially if transparency improves. However, the potential impact of the probe on the broader backdrop, investment and capital outflows bears watching. While raising uncertainty, the probe likely supports reform efforts and provide grounds for continuing to gear energy policy towards supporting oil prices. The possible confiscation of embezzled funds to return them to the state treasury is unlikely to provide much support to SAMA FX reserves. A maximum of $100 billion in offshore funds was held by the private sector at year-end 2015.

“We would expect only a small fraction of that to be at risk (which would require proof of links to corrupt practices) within this probe, and expect assets frozen to include material domestic holdings,” said Saliba.


Fundamentals have deteriorated faster than expected. FX reserves have dropped materially due to dollarization, financial outflows and twin imbalances‎, while government debt dynamics are unanchored. We expect GCC support to Bahrain to move to being conditional and explicit, from unconditional and implicit previously. Key risks would be if market access is compromised in the coming period or if dollarization and capital outflows pick up.

The $3 billion bond issuance in September (8.9 per cent of GDP) should allow some room for negotiations to complete over 1H18. The costs of letting Bahrain fail remain higher than the costs of GCC support. Support to Bahrain's USD peg is a GCC priority to avoid contagion risk. Similarly, forcing Bahrain into a debt restructuring is unlikely as it would raise GCC financing costs at a time when regional gross financing needs remain substantial. Last, GCC support allows market access to Bahrain, which in turn minimizes Bahrain's need to access GCC resources.

“We maintain Bahrain EXD on Overweight as we anticipate a positive completion for negotiations with the GCC on a reform and financial support package,” said Jean-Michel Saliba.- TradeArabia News Service

Tags: Saudi Arabia | Bahrain | BofA Merrill Lynch |

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