Despite the stock market slide, clear concern over tariffs among Republican legislators and even reports of divisions
within the Administration itself there is, therefore, no reason to
suppose that Mr Trump is about to have what would amount to a Damascene
conversion. Indeed, if the FT’s Gillian Tett is correct in pointing to
work on geoeconomics by Albert Hirschman (as updated in this recent paper
by Christopher Clayton, Matteo Maggiori and Jesse Schreger) as the
intellectual underpinning of these theories, it seems inevitable that we
are in for a long haul.
In the light of the surprise 3 April decision
to unwind the voluntary cuts in oil output faster than had previously
been announced, on the face of it it looks as if Opec+ too has failed to
grasp this. Even before the 3/4 April sell-off (to which, for sure, the
announcement contributed), a neutral would have struggled to see “the continuing healthy market fundamentals and the positive market outlook” claimed by the cartel as justification. Instead, top oil analyst Amrita Sen (quoted in the FT) is undoubtedly correct that “Bringing forward the unwind is a way to put pressure on the [quota-busters]”. However, despite the failure of similar efforts in 2014-16
I wonder whether Riyadh seized the moment to push the oil price farther
downwards to discourage non-Opec members, especially in the US, from
investing in new output.
As for possible threats which could push the price of crude higher, to upside and downside risks I discussed in the 31 March Newsletter
I would simply add that Mr. Trump’s exemption of Russia even from his
ten percent ‘baseline’ tariffs strongly suggests that he would only
impose fresh sanctions on Moscow with considerable reluctance.
One way or the other, MENA economies are far from immune to the
impact of the Trump tariffs with, in simple terms, the region splitting
into two categories, i.e. Gulf oil exporters and import-dependent Levant
and North Africa economies.
For the oil exporters, with energy tariff-exempt the principal impact
is ‘secondary’, i.e. rooted in a tariff-related global slowdown and
consequent softening in demand for oil and gas. As noted in the 6 February Newsletter,
to balance its 2025 budget Saudi Arabia needs Brent at US$91pb.
According to the IMF, the UAE is in the stronger position of being able
to balance its budget at US$57pb but it is by no means inconceivable
that we shall see prices sinking through this mark.
An additional secondary impact specific to economies whose currency
is pegged to the dollar — notably Oman, Qatar, Saudi Arabia, the UAE and
(non-oil producing) Jordan — lies in the inflationary effect within the
US itself of the tariffs, which may well spill over into exchange
rates. One would expect the tariffs, once they come into effect, to
strengthen the dollar, initially at least, as US imports fall. In times
of uncertainty this should be compounded by markets’ propensity to seek
‘safe havens’. However, as the US itself is the primary source of the
current uncertainty (including through the manner in which tariff rates were ‘calculated’), the dollar fell sharply on 3 April,
dragging down pegged currencies with it. All other things being equal,
in particular this will fuel inflation for economies with significant
dependence on imported foodstuffs. Any boost which a weaker dollar gives to economies whose country is not pegged is likely to be far outweighed by the global slowdown.
As for non-hydrocarbon exporting economies, Egypt (apparel, textiles), Jordan (apparel, pharmaceuticals) and Morocco
(auto parts, EV batteries) are in the forefront of those who stand to
suffer unless they can find alternative markets. Expect a surge in free
trade talks with non-US partners, the EU in particular.
As if this were not all bad enough, it is far from clear what MENA
countries can do to win at least some relief from tariffs. For example:
Jordan is among several which have a longstanding free trade agreement
with the US but it has still been hit with 20 percent tariffs; Israel
scrapped all tariffs on imports from the US last month but has been
clobbered to the tune of 17 percent; and both Saudi Arabia and the UAE
preemptively committed to major investment in the US but still face the
‘baseline’ ten percent.
In the latter case, perhaps we shall learn more when Mr. Trump visits the Gulf
in May/June. However, such is the readily apparent randomness of
allotted tariffs that, even if we do, there is very unlikely to be any
guidance of wider applicability.
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