In 2009, the internationally renowned economist, Mohamed El-Erian, coined the term New Normal: an economic alteration of normalcy in the aftermath of a global recession. Now that the coronavirus pandemic has posed a growth environment dampened by structural impediments, the world is yet to be taken aback by a possible new ‘New Normal’.
Predicting a Market Crash 101
Energy stocks posted a sharp decline on April 20 as West Texas Intermediate (WTI) prices dipped to a historic negative $37 per barrel. This inevitably paved the way for a crude market collapse, and the fact is that the global oil industry is still in dire straits. But could this have been predicted in the first place, and maybe even averted?
Most analysts would have never believed that oil prices could sink into negative territory and often said that “negative oil price” was just an attention-grabbing headline.
However, some big investors saw warning signs before the market came tumbling down. Earlier in 2018, Egyptian tycoon Naguib Sawiris predicted a stock market crash and has put half of his $5.7 billion net worth into gold.
“I think it was calculated,” Sawiris told CNBC on May 11. “I think they knew that this was going to happen and they still wanted to do it because, by killing a competitor, the price will rise beyond $50 or $60.” Sawiris added that he believes that in 2021 oil will rebound to $100. However, an oil analyst who warned of negative oil prices a month ago now says that the WTI Crude future prices could crash to as low as a negative $100 per barrel in the upcoming months.
Alaa El-Shazly, Professor at Cairo University, told Egypt Oil & Gas that when the oil price dropped to below zero, it represented an oil market shock related to a pandemic that took us all by surprise.
Likewise, Pascal Deavux, Senior Economist at BNP Paribas MENA, told Egypt Oil & Gas that such a fall in global oil demand was impossible to predict since it was directly linked to COVID-19. “Nevertheless, this fall has been exacerbated by the war price between the main producers that has entailed an increase in production,” he added.
Winter is Coming
Experts believe that a geopolitical chess board is paving the way for the next Cold War, made up of four main players: Saudi Arabia and Russia in a price war, and the US and China in the backdrop of a pandemic’s predicament.
The price war between the Organization of the Petroleum Exporting Countries (OPEC) leader Saudi Arabia and Russia was said to be a calculated effort to kill the shale industry in the US. It is estimated that this dilemma could cause inventories to swell by 900 million barrels in the Q2 2020.
According to an article, published by the Guardian on March 22, even before the downturn of prices the foreseeable oil price war was beginning to compromise any chances of international cooperation in a crisis. Meanwhile, the foreign-policy editorial on April 9 opined that a new era in international politics is emerging, defining the features of this post-Cold War era as a competition among great powers and a realignment of US foreign relations.
US President Donald Trump has already begun mulling a fresh trade war with China when he told Fox News on May 3 that he was considering restoring tariffs as the “ultimate punishment” for the country he blamed for the global pandemic. According to a forcast by the Center for Strategic and International Studies, a think tank based in Washington, the exports of US goods to China could come in at only $60 billion for all of 2020 — much lower than the $186.6 billion needed according to the agreement that both countries signed in January.
Trump’s threats have led many experts to conclude that a new cold war is slowly being forged.
The Spillover Effect
Meanwhile, the OPEC’s decisions are extending beyond production to create a spillover effect and provoke a financial crisis. According to Deavux, for the weakest producers, there is a risk of balance of payment crisis, currency depreciation and rising public debt at a very high level. “It will slow the process of economic reforms and diversification because of the lack of financial means,” he explained.
El-Shazly, on the other hand, thinks that the oil price crisis negatively affects both exporting and importing countries once production levels are cut significantly. “The effect of the oil price shock would be a slowdown in extraction and production activity because of storage capacity problems and sluggish economic activity around the globe. Recovery can take time depending on the use and effectiveness of stimulus packages,” El-Shazly emphasized.
In a webinar hosted by Nile University on May 7, El-Erian said, “the priority is that you do not want short-term problems become long-term impediments. You do not want people who lost their jobs in the short-term to become a long-term unemployment. You do not want a small business that simply has no sales to suddenly become bankrupt. How do you do that? By borrowing.”
The European Bank for Reconstruction and Development (EBRD) approved an initial $850 million in loans to the financial sector in Egypt with a special focus on trade facilities and small-to-medium enterprises (SMEs). In an interview with Ahram Online, held virtually from Jordan on May 5, Managing Director of the EBRD’s southern and eastern Mediterranean (SEMED) region Heike Harmgart said, “the decline of oil prices is a double-edged sword. If a country is an oil importer, low prices are very good, so countries want to make sure they increase their storage capacity to make sure they benefit as much as possible from the low prices.”
Deavux thinks that in the current situation, it is positive if countries resorted to international organizations such as the IMF and the World Bank to prevent the economic consequences of the current economic crisis. This maintains macro metrics at an acceptable level, and gives confidence to foreign investors. On the contrary, it is not a good thing if it were used to fix structural imbalances that are not linked to the current crisis.
Egypt’s Post COVID-19 Economy
“It is always a mixed bag, the government and private sector should benefit from this decrease in oil prices, but the remittances will be affected,” according to Harmgart. Emerging markets should ensure additional funding for health and social protection, and to prepare investments for the real economy through facilities of the institutions that support the private sector, the Managing Director added.
In this regard, Egypt has fast-tracked approvals for the IMF loan and is doing an excellent job in trying to reach out the international institutions and organizations to make sure to get both macro and micro support, Harmgart stated.
In a phone call on Amr Adib’s El Hekaya TV Program, the Former Minister of Petroleum and Mineral Resources, Osama Kamal, said that Egypt has actually benefited from the oil price decline during the last period by storing sufficient quantities of oil.
He noted that Egypt will neither be directly affected positively nor negatively by the current collapse of oil prices, but this might contribute in decreasing the burden of financial support from the public budget. Kamal elaborated that its only negative effect would be when US oil companies cut their exploration and discovery investments in the different countries including Egypt.
Maintaining Presence amid Deglobalization
Meanwhile, El-Erian spoke of the dwindling globalization and the rise of localization. “You cannot globalize the world when the two largest economies (the US and China) are fighting,” he said. He further linked deglobalization to company behavior, saying that companies have realized that globalization put production where it is cheapest.
“All that is efficient, but it is not resilient. So, we are going to see a swing in the pendulum from efficiency to resilience. People are going to localize supply chains, entangling the private sector with the public sector,” he declared.
Yet, Harmgart stressed that Egypt is unlikely to enter a recession period like the other countries in the region and across the globe.“I do not think it will be the new normal. Actually, oil prices are expected to increase again in H2 2020, although probably will not reach the pre-COVID-19 levels immediately,” she concluded.