The news on the economy continues to be grim. I went searching for data to help us understand what is going on. I was surprised at what I found. You’ll have to read the article to find out if the surprise was pleasant or not.
In the absence of a team of research analysts to mine the data that I need (free marketing anyone?) I need to use what is available. One of the best sources of aggregate economic information is provided by the Central Bank of the UAE, available for free on their website.
As a start I took a look at their monthly statistical bulletin for June 2016, which they note is preliminary. I decided to look at some of the more oft repeated mantras and see if the data matched. Looking at what is happening with the banks should give us a good idea at what is happening generally.
One of the scariest pontifications is that the government is withdrawing its deposits, thus squeezing the economy by limiting the ability of banks to lend. Government deposits increased to 184 billion dirhams up 14% from 161 billion one year ago in June 2015. So, no, the government is not withdrawing deposits, it has added to them substantially. Pleasant surprise.
Okay, if the government is supporting the economy via bank deposits why all the brouhaha about banks not lending? One argument has been that banks might be panicking and therefore refusing credit. Let’s check. Over a single year total bank domestic credit is up 7.7% to 1.4 trillion dirhams from 1.3 trillion. In real terms that is an extra 100 billion of credit that the banks gave in one year. Cynics might point out that banks have been known to restructure bad loans into new loans, making it look as if they are giving when credit when in reality they are rolling over bad debt with interest. I’ll grade this a semi-pleasant surprise.
Related to the above two points is that the government or its related entities, the GREs discussed in my previous article, might be crowding out private lending. Government lending increased by 132 million, a 0.1% increase. No change. The public sector though increased to 20 billion, a 12% increase versus the private sector’s 70 billion or 7% increase. The public sector in absolute terms grew at little over a quarter of the private sector but in relative terms the growth was two thirds that of the private sector. Not a big deal for a single year, quite worrying if this is a trend. Pleasant surprise for the government, neutral to negative for the public sector.
How about this flight of expats from the region we keep hearing about? The total expat deposits increased by 21.4 billion dirhams, a 13.7% increase. But this includes expat corporates as well, which increased deposits by 19.7 billion dirhams, a 32.2% increase. Retail expat deposits increased by 1.7 billion, a smaller 1.8% increase. The foreign corporate deposit increase is a pleasant surprise. The retail expat question is a different matter. The small increase could be due to off-shore remittances or simply that the less well to do feel the pinch first and leave first. So on this issue we remain uncertain.
Overall, what we’ve seen so far seems to point to positive economic indicators. This seems to conflict with the dropping profits and the continuing layoffs. What gives?
The Monthly Statistical Bulletin of the Central Bank looks primarily at the aggregate balance sheets of the banks but not the income statement or cash flow statement. It also does not look at the rest of the economy.
What this means is that the above analysis has by and large ruled out a major credit contraction as existing. It can have an effect on the economy by banks increasing interest rates and changing their risk profiles by increasing lending to large corporates and decreasing to the SMEs that provide over 50% of the country’s GDP.
So what gives. A bit of digging in the substantial databases of The Federal Competitiveness and Statistics Authority uncovered something interesting. The key culprit is Gross Fixed Capital Formation (GFCC) which measures how much was invested in fixed, durable assets such as plant, machinery, equipment, buildings, roads and drains.
Whilst percent growth in spending or GDP shows the picture for the year, e.g. if the government spends 100 dirhams one year and this grows 5% then you it spends 105 the following year. If GFCC is 100 dirhams one year and this grows by 5% then the total output potential the following year is not equivalent to 105 of assets, but 205 of assets. Spending is annual, GFCC is cumulative. What this means is that if the economy contracts it is very difficult for the fixed assets to contract. Worse, the loans used to invest in these fixed assets need to be services.
The graph above shows this beautifully. Although growth in both GDP and government spending is still positive, it has dropped well below where the fixed asset based needs to become fully utilised.
The moral of the story? The private sector shouldn’t expect its free lunch to last forever.