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MEA Macro Report

South Africa:

Tomorrow, South Africa will propose its fiscal budget for 2016 which South Africans are hoping will reverse the current credit downgrade pressure. South Africa is currently rated a notch above sub-investment grade with markets expecting an eventual downgrade. South Africa is suffering from low growth (due to low commodity prices and decreased demand from China), a loss of financial credibility and subsequent capital outflows. The IMF projects South Africa to grow by 0.7% for 2016. Analysts will look for fiscal consolidation, an increase in taxes, and debt to remain at ~3% of GDP, all while increasing South Africa’s growth prospects. A downgrade would increase the cost of borrowing for both the state and individuals (making growth prospects even bleaker) as well as lead to further capital outflows.

 

Middle East:

Last week Saudi Arabia and Russia, with the backing of Qatar and Venezuela, agreed to freeze oil output in an effort to halt the 70% price depreciation over the past 18 months. The deal is contingent on other OPEC producers to agree to output freezes, which is seen as unlikely due to Iran’s introduction into the oil supply after trade sanctions were lifted last month (Iran’s oil minister told national news outlet that Iran wouldn’t cede market share). Continual monitoring of situation will be necessary.

BP released an interesting long-term projection about the oil market over the next 20 years. Due to the shale-oil revolution, BP projects that oil reserves will continue to grow at a greater rate than consumption, meaning that oil prices are unlikely to increase in the long run. OPEC will be able to maintain market share but won’t be able to effect the market like it used to. This will make the US self-sufficient in coming years and a net exporter, therefore effecting the dynamics of the oil supply market and OPEC countries.

However, shale companies are still highly indebted and are therefore reliant on banks/creditors and subsequent financial instability. It is also important to take long-term projects with a fair amount of scepticism due to inability to fully forecast geopolitical, environmental, growth and other relevant risks/factors. 

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