6/11/2016

ARAMCO Could Bring 150B to Wall Street Banks

The planned initial public offering of oil colossus Saudi Aramco has kicked off a scramble among banks for a role in a deal that could generate $US1 billion ($1.34bn) in fees and help define success or failure on Wall Street for years.

By virtually any measure, Saudi Arabian Oil Co, as it is formally known, is one of the largest enterprises on earth. Saudi Arabia has said the state-owned company could be worth $US2 trillion-$US3 trillion — roughly equal at its midpoint to the total market value of every other publicly traded oil and gas company in the world, according to S&P Global Market Intelligence.

Ever since Saudi Arabia indicated in January that it was eyeing a public listing for Aramco, senior bankers at the world’s largest fin­ancial institutions have been swarming around the company’s headquarters seeking to ingratiate themselves with officials and win a piece of the biggest investment-banking deal ever.

The pay-off for enduring such scrutiny is expected to be rich. The kingdom has indicated it could float as much as 5 per cent of Aramco, which would mean proceeds of as much as $US150bn, and list it on multiple international exchanges. At that level, the IPO would blow past Alibaba’s $US25bn offering in 2014 as the biggest in history. Other benefits could be substantial, too.

Underwriters typically earn fees of about 2 per cent on deals over $US10bn, according to market-data provider Dealogic. Fees on privatisations tend to be lower, and Aramco is expected to drive a tough bargain.

But even if the fee pool comes in well under 1 per cent, as one source said it might, it could still be as high as $US1bn. Other business could also follow as key underwriters are typically well-positioned to trade the new securities; given the company’s sheer size, the volume of turnover in Aramco shares could be immense.

Current U.S Labor Market

AMERICA’s labour market has become a reliable source of comfort when other economic indicators dismay. When growth slowed to just 0.8% in the first quarter of the year, economists were mostly unperturbed, because payrolls were growing by over 150,000 workers a month. Wage growth was picking up. Even labour-force participation was rising, after a long period of decline.

So the news on June 3rd that the economy created a mere 38,000 new jobs in May—the lowest total since 2010—was a nasty shock. Three days later Janet Yellen, the Fed’s chairman, hinted that she no longer favours raising interest rates this summer. This abrupt change of direction followed weeks of warnings from Fed officials that a rate rise was coming, perhaps as soon as the conclusion of the Fed’s next meeting on June 15th. That now looks all but impossible.

The report, taken alone, was dire. But on the whole, there is much less cause for gloom. The American economy may have slowed, but remains fundamentally strong, as it is buttressed by a healthy consumer. Personal consumption, adjusted for inflation, is up by 3% in the past year, having surged in April. The University of Michigan’s consumer-confidence index, which was due to be updated as The Economist went to press, grew strongly in May. Even before that, confidence exceeded its average during the 2003-07 boom. According to a recent Fed survey, 69% of Americans say they are “doing okay” or “living comfortably”, up from 62% in 2013. What is more, the rise has been most pronounced among those with only a high-school education.

But demographic change is keeping average wage growth artificially low. The financial crisis struck when the oldest baby-boomers were nearing retirement age. As well-paid boomers retire, average wages fall. In addition, many low-wage workers, who were disproportionately likely to lose their jobs during the recession, are now returning to work, which also pulls average wages down.

At the same time, Americans have been leaving petrol stations with fatter wallets, thanks to cheaper oil. Consumers did save more of the petrol-price windfall than expected. But that means that now oil prices are firming—on June 7th Brent crude surpassed $50 a barrel for the first time since October—consumers will not have to rein in spending much in response

Somewhat higher oil prices should also help put an end to another drag on the economy: pallid investment, which was partly responsible for the first quarter’s slow growth. Investment in oil rigs and the like has fallen by almost 70% over the past two years, adjusted for inflation, as investors have mothballed shale-oil and -gas projects.

When will U.S Interest Rates Rise

The world economy is a worry. Europe has not yet secured its recovery (see next story), Brexit is a growing concern, and the Chinese economy remains fragile. Financial markets, which tanked early in the year on account of the world economic outlook, are sturdy for now—after Ms Yellen’s dovish comments, the S&P 500 rose close to a record high. But the world economy could yet shake markets again.

Even if it doesn’t, the contrast between American vigour and torpor abroad will delay interest-rate rises, argues Mark McClellan of the Bank Credit Analyst, a newsletter, because the Fed cannot tighten monetary policy without sending the dollar on a tear. That could itself cause renewed financial-market wobbles, particularly in emerging markets with dollar-denominated debts. It would also dampen inflation, which remains below the Fed’s 2% target, as the dollar’s strength made imports cheaper.

Where next, then, for Ms Yellen? She rightly says that raising interest rates is not a goal in itself, and describes today’s near-zero rates as only “modestly” accommodative—a reminder that the so-called “natural” rate of interest, the rate which neither stimulates nor dampens the economy, is probably much lower than it used to be. The Fed will probably need convincing that the latest labour-market report was an aberration before tightening policy. The next few months should provide such reassurance. Come what may, expect Ms Yellen to take only baby-steps.

Interest Rates in Europe

Europe is at risk of suffering lasting economic damage from weak productivity and low growth, the European Central Bank's president warned on Thursday, underscoring his argument that monetary policy alone cannot end the bloc's economic malady.

The ECB has been easing policy aggressively to boost growth and inflation in recent years with little to show for its efforts, fuelling arguments that monetary policy was at its limits and governments needed to help out.

"We do not let inflation undershoot our objective for longer than is avoidable given the nature of the shocks we face," Mario Draghi told the Brussels Economic Forum. "For others, it means devoting every effort to ensuring that output is returned to potential before subpar growth causes lasting damage."

"There are many understandable political reasons to delay structural reform, but there are few good economic ones. The cost of delay is simply too high," he added.

The euro zone grew by just 1.6 percent last year with much of the expansion coming from the ECB's stimulus and growth is expected to flatline over the next several years with inflation also holding below the ECB's target of close to 2 percent.

Draghi said growing below potential for too long actually reduced the economy's potency because instead of output rising toward capacity, potential would fall toward the actual output, permanently embedding low growth.

Draghi said growing below potential for too long actually reduced the economy's potency because instead of output rising toward capacity, potential would fall toward the actual output, permanently embedding low growth.

"Given the harm that has already occurred to potential growth during the crisis, it also means (a need for) acting decisively to raise potential," Draghi said.

Singling out areas for improvement, Draghi said the euro zone was lagging behind in innovative capacity, particularly in the services sector, and needed to utilize the latent potential in the euro area labor force, which can be unleashed with appropriate labor market and activation policies.