If it has felt slightly windier than normal this week, it is very likely due to the enormous vacuum that was switched on in Washington, where Uncle Sam was attempting to suck up US$115 billion (Dh422.39bn) in new borrowing.
Now, $115bn is a lot of money, even in Washington. It works out to almost 47 billion gallons of petrol, enough to drive one of GM's gas-guzzling Hummers from Capitol Hill to Beijing and back 57 million times (if Hummers could float). In fact, $115bn is a record amount of weekly borrowing for the US government, topping the last weekly record set back in June, when it borrowed $104bn.
The new borrowing, which the US does by selling bonds, is part of an estimated $2 trillion that the US government will need to borrow this year to help resuscitate the world's largest economy. That's something America's biggest trading partners, such as China, can support, because it means potentially re-starting the heart muscle of consumption that pumps wealth through the global economy.
But the same big exporters, more particularly the central banks and sovereign wealth funds (SWFs) that manage their export earnings, are more worried these days about the growing levels of debt in the US and in other developed economies. After making the rounds of six SWFs in Asia and the Gulf, strategists at Nomura in Hong Kong came away with the message that the funds are unhappy that developed economies get such high credit ratings from the likes of Standard & Poor's and less-indebted emerging economies such as, say, China, get such low ones.
Sovereign fund managers work hard to minimise the risk that they'll lose money. And when it comes to bonds, the most widely used measure of risk is a credit rating. What clearly irks the SWFs is that credit ratings no longer strongly correlate with relative returns, since the highest rated debt looks like a bad bet, while there is a better case for buying debt from countries with stronger finances, but lower ratings. But a fixed-income manager at, say, the Abu Dhabi Investment Authority (ADIA), cannot very well start dumping his "AAA"-rated treasuries and buying up "BB plus" Philippine bonds instead without setting off alarm bells inside the ADIA's risk-management department.
So the SWFs are in a quandary: the IMF forecasts that public debt levels in the US and other developed economies in Europe and Japan will rise to 117 per cent of their combined GDP, while in Asia and emerging markets, public debt levels are only 47 per cent of GDP.
Like anything that suddenly becomes common, the more bonds a country sells, the less people think they are worth. To sell $1bn in bonds, you have to offer them a higher interest rate, or yield. And, of course, the more you borrow and the higher your interest payments, the more worried people get that you won't be able to pay them back. You have to promise them an even higher yield to compensate for that risk.
The US government's yields have not risen. For one, investors worried about the state of the global economy were too scared to invest in anything else. The US government has traditionally been considered the safest borrower on the planet. Plus, there are so many US bonds out there that if you buy them, you can be pretty sure you can sell them if you need cash fast. They are "liquid".
Since the crisis struck, though, the US Treasury has also been able to count on loans from the Federal Reserve, which is determined to keep interest rates low to stimulate the economy. The Fed cannot print dollars, but it can conjure them as if by magic just by buying bonds from the US Treasury. So far, the Fed has snapped up about $220bn worth of US bonds, pumping imaginary dollars to the US government to help the economy and bail out companies such as GM. The Treasury has also found a ready new source of demand in the American public, which thanks to the recession is saving money like it never did before.
But printing imaginary dollars and issuing bonds like confetti makes America's foreign creditors in Asia and the Gulf uneasy. Because most foreign trade is conducted in US dollars, exporting nations tend to squirrel away their dollars in case the flow of money suddenly reverses and they need boatloads of dollars in a hurry. Big exporters such as China and Abu Dhabi also tend to amass more reserves than they really need to keep their own currencies from rising with their trade surpluses, thereby eroding the competitiveness of their exports. China recently announced that in spite of the global recession its own foreign-currency reserves had risen to more than $2tn.
They don't just keep all those dollars in a safe somewhere. They invest them and earn even more. So far they have tended to buy US securities, largely US government bonds, in part because of their low risk, and in part because they want to hold dollars. China, for example, is now America's largest foreign creditor, with at least $800bn in US bonds.
The danger for these sovereign funds and central banks has always been that the more dollar bonds they buy, the more vulnerable they are to a decrease in the value of the bonds, or of the dollar. And with the US government issuing more and more bonds and using more and more dollars to buy them, the risk of such a depreciation looks ever greater.
That's why the SWFs are quibbling over the credit ratings. Tough luck, guys. A credit rating is not a measure of currency risk. It is a measure of default risk. And no matter how much they borrow, the US, Europe and Japan have the ability to do something the emerging economies still can't manage: sell debt abroad in their own currencies. That enables rich countries to finance their deficits and, if payments get too tough, print more currency and lower their loan levels in real terms.
At times like these, a weak dollar is in America's best interest, no matter what officials might say when they visit Beijing, Jeddah or Abu Dhabi. If SWFs want to turn the tables, they will have to insist that the US start paying them back in their own currency. And that's a risk most seem unwilling to take.
warnold@thenational.ae
Final scores
18 under: Tyrrell Hatton (ENG)
- 14: Jason Scrivener (AUS)
-13: Rory McIlroy (NIR)
-12: Rafa Cabrera Bello (ESP)
-11: David Lipsky (USA), Marc Warren (SCO)
-10: Tommy Fleetwood (ENG), Chris Paisley (ENG), Matt Wallace (ENG), Fabrizio Zanotti (PAR)
AS%20WE%20EXIST
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Coming soon
Torno Subito by Massimo Bottura
When the W Dubai – The Palm hotel opens at the end of this year, one of the highlights will be Massimo Bottura’s new restaurant, Torno Subito, which promises “to take guests on a journey back to 1960s Italy”. It is the three Michelinstarred chef’s first venture in Dubai and should be every bit as ambitious as you would expect from the man whose restaurant in Italy, Osteria Francescana, was crowned number one in this year’s list of the World’s 50 Best Restaurants.
Akira Back Dubai
Another exciting opening at the W Dubai – The Palm hotel is South Korean chef Akira Back’s new restaurant, which will continue to showcase some of the finest Asian food in the world. Back, whose Seoul restaurant, Dosa, won a Michelin star last year, describes his menu as, “an innovative Japanese cuisine prepared with a Korean accent”.
Dinner by Heston Blumenthal
The highly experimental chef, whose dishes are as much about spectacle as taste, opens his first restaurant in Dubai next year. Housed at The Royal Atlantis Resort & Residences, Dinner by Heston Blumenthal will feature contemporary twists on recipes that date back to the 1300s, including goats’ milk cheesecake. Always remember with a Blumenthal dish: nothing is quite as it seems.
The National's picks
4.35pm: Tilal Al Khalediah
5.10pm: Continous
5.45pm: Raging Torrent
6.20pm: West Acre
7pm: Flood Zone
7.40pm: Straight No Chaser
8.15pm: Romantic Warrior
8.50pm: Calandogan
9.30pm: Forever Young
Where to buy
Limited-edition art prints of The Sofa Series: Sultani can be acquired from Reem El Mutwalli at www.reemelmutwalli.com
The%20specs
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Company%C2%A0profile
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COMPANY PROFILE
Name: Kumulus Water
Started: 2021
Founders: Iheb Triki and Mohamed Ali Abid
Based: Tunisia
Sector: Water technology
Number of staff: 22
Investment raised: $4 million
The drill
Recharge as needed, says Mat Dryden: “We try to make it a rule that every two to three months, even if it’s for four days, we get away, get some time together, recharge, refresh.” The couple take an hour a day to check into their businesses and that’s it.
Stick to the schedule, says Mike Addo: “We have an entire wall known as ‘The Lab,’ covered with colour-coded Post-it notes dedicated to our joint weekly planner, content board, marketing strategy, trends, ideas and upcoming meetings.”
Be a team, suggests Addo: “When training together, you have to trust in each other’s abilities. Otherwise working out together very quickly becomes one person training the other.”
Pull your weight, says Thuymi Do: “To do what we do, there definitely can be no lazy member of the team.”
Community Shield info
Where, when and at what time Wembley Stadium in London on Sunday at 5pm (UAE time)
Arsenal line up (3-4-2-1) Petr Cech; Rob Holding, Per Mertesacker, Nacho Monreal; Hector Bellerin, Mohamed Elneny, Granit Xhaka, Alex Oxlade-Chamberlain; Alex Iwobi, Danny Welbeck; Alexandre Lacazette
Arsenal manager Arsene Wenger
Chelsea line up (3-4-2-1) Thibaut Courtois; Cesar Azpilicueta, David Luiz, Gary Cahill; Victor Moses, Cesc Fabregas, N'Golo Kante, Marcos Alonso; Willian, Pedro; Michy Batshuayi
Chelsea manager Antonio Conte
Referee Bobby Madley
2025 Fifa Club World Cup groups
Group A: Palmeiras, Porto, Al Ahly, Inter Miami.
Group B: Paris Saint-Germain, Atletico Madrid, Botafogo, Seattle.
Group C: Bayern Munich, Auckland City, Boca Juniors, Benfica.
Group D: Flamengo, ES Tunis, Chelsea, (Leon banned).
Group E: River Plate, Urawa, Monterrey, Inter Milan.
Group F: Fluminense, Borussia Dortmund, Ulsan, Mamelodi Sundowns.
Group G: Manchester City, Wydad, Al Ain, Juventus.
Group H: Real Madrid, Al Hilal, Pachuca, Salzburg.
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
Brief scores:
Toss: Sindhis, elected to field first
Kerala Knights 103-7 (10 ov)
Parnell 59 not out; Tambe 5-15
Sindhis 104-1 (7.4 ov)
Watson 50 not out, Devcich 49
RESULTS
5pm: Maiden (PA) Dh80,000 1,200m
Winner: Ferdous, Szczepan Mazur (jockey), Ibrahim Al Hadhrami (trainer)
5.30pm: Arabian Triple Crown Round-3 Group 3 (PA) Dh300,000 2,400m
Winner: Basmah, Fabrice Veron, Eric Lemartinel
6pm: UAE Arabian Derby Prestige (PA) Dh150,000 2,200m
Winner: Ihtesham, Szczepan Mazur, Ibrahim Al Hadhrami
6.30pm: Emirates Championship Group 1 (PA) Dh1,000,000 2,200m
Winner: Somoud, Patrick Cosgrave, Ahmed Al Mehairbi
7pm: Abu Dhabi Championship Group 3 (TB) Dh380,000 2,200m
Winner: GM Hopkins, Patrick Cosgrave, Jaber Ramadhan
7.30pm: Wathba Stallions Cup Conditions (PA) Dh70,000 1,600m
Winner: AF Al Bairaq, Tadhg O’Shea, Ernst Oertel
SPEC%20SHEET%3A%20APPLE%20M3%20MACBOOK%20AIR%20(13%22)
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The rules on fostering in the UAE
A foster couple or family must:
- be Muslim, Emirati and be residing in the UAE
- not be younger than 25 years old
- not have been convicted of offences or crimes involving moral turpitude
- be free of infectious diseases or psychological and mental disorders
- have the ability to support its members and the foster child financially
- undertake to treat and raise the child in a proper manner and take care of his or her health and well-being
- A single, divorced or widowed Muslim Emirati female, residing in the UAE may apply to foster a child if she is at least 30 years old and able to support the child financially
NO OTHER LAND
Director: Basel Adra, Yuval Abraham, Rachel Szor, Hamdan Ballal
Stars: Basel Adra, Yuval Abraham
Rating: 3.5/5
COMPANY%20PROFILE
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A MINECRAFT MOVIE
Director: Jared Hess
Starring: Jack Black, Jennifer Coolidge, Jason Momoa
Rating: 3/5
Europe’s rearming plan
- Suspend strict budget rules to allow member countries to step up defence spending
- Create new "instrument" providing €150 billion of loans to member countries for defence investment
- Use the existing EU budget to direct more funds towards defence-related investment
- Engage the bloc's European Investment Bank to drop limits on lending to defence firms
- Create a savings and investments union to help companies access capital
BRAZIL%20SQUAD
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Anghami
Started: December 2011
Co-founders: Elie Habib, Eddy Maroun
Based: Beirut and Dubai
Sector: Entertainment
Size: 85 employees
Stage: Series C
Investors: MEVP, du, Mobily, MBC, Samena Capital
The specs
Engine: 4.0-litre flat-six
Torque: 450Nm at 6,100rpm
Transmission: 7-speed PDK auto or 6-speed manual
Fuel economy, combined: 13.8L/100km
On sale: Available to order now
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