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HSBC oil & gas research

The Middle East - regimes will likely prove resilient…but there are no easy answers to unprecedented calls for change.

Economic growth likely to weaken markedly wherever unrest has been pronounced. Many regimes have experienced only mild civil protest, and a combination of substantial additional fiscal spending, the support of the military, and disunity among populations should allow them to maintain order. The scale of fiscal outlays looks affordable with oil at USD100/b, and Western support remains in place. At the same time, we find it hard to imagine that the region can simply return to the status quo ante. Although we expect higher oil prices and rising production to allow the MENA region as a whole to record relatively robust growth of 4.2% in 2011, the events of 1Q11 will have lasting negative economic consequences, which could exacerbate dissatisfaction. For Egypt and Bahrain, we have marked down our 2011 GDP forecasts by 6ppts and 4ppts respectively. Even in the more politically stable countries of the region, we expect more sluggish private sector growth performances as perceptions of regional political risk rise, reducing confidence among lenders, investors, tourists and consumers alike. For the region’s oil producers, higher prices and production will keep them in surplus even as they expand spending, mitigating the impact of this lower private sector growth. Saudi Arabia’s USD130bn stimulus plan stands out, but we expect government spending to rise as a percentage of GDP across the region.

Click here - HSBC Middle East Economics Quarterly Q2 2011

Asia - It was all going well for a while. Growth surged in recent months and, despite some inflation jitters, the outlook was bright. But, suddenly, growth appears to be slipping. The next few months will prove more challenging than expected. Supply disruptions from Japan, high oil prices, and the lagged effect of tightening, especially in China, will give Asia a little jolt. Make no mistake: this doesn’t mean the region is at risk of going into free-fall. Rather, Asia will hang on and resume its ascent. But, momentarily, worries will shift from inflation to growth. The rise in oil prices has also been too rapid for comfort. The direct impact will be less severe in Asia than elsewhere given the region’s protective layer of subsidies and price controls. In addition, strong income growth and further scope for exchange rate appreciation will help to cushion the blow. Still, Asia will feel a pinch as crude prices keep climbing higher. India stands out as especially vulnerable, and so does Japan, which is already struggling with an unprecedented disaster. Others are exposed as well:

economies such as Korea, Taiwan, and Thailand are particularly oil intensive. The bigger worry for Asia, however, is the damage that high oil prices may do to exports. If consumers in the West begin to cut back, shipments will slow at a time when local households are already turning more cautious. Fortunately, China still stands like a rock.

Click here - HSBC Asian Economics Quarterly - Q2 2011

Latin America - Food prices are feeding into broader demand-led inflation in many countries in Latin America. Among the inflation-targeting countries, Brazil and Uruguay appear to face more pronounced inflationary risks, while Chile and Mexico stand out on the lower risk side. Looking at the non-targeters, the political cycle suggest upside risks in Argentina and Venezuela. Even if central banks have responded in a less-hawkish manner than in the past, the region as a whole is gradually responding to the inflationary challenge. Brazil and Uruguay appear as the countries with more pronounced inflationary pressures. The analysis of the responses of the authorities also suggests that, despite having already started to tighten policies, both countries are clearly delayed in the process. While Peru and Colombia show a mixed picture, Mexico and Chile display a more favourable situation. Chile, in particular, has been quickly catching up with the necessary tightening in order to keep its inflation around target.

Click here -  HSBC Economics - Lat Am Quarterly Q2 2011