May 2017: Oil in twilight zone

Oil prices are recovering this year from the 13-year lows seen in early 2016. But the upturn is unlikely to reassure producers because the fundamentals of demand, supply and exchange-rate dynamics point to price weakness continuing for some time. In January, the Organisation of the Petroleum Exporting Countries agreed to adjust production with the aim of stabilising prices. The oil market remains in the twilight zone – but this can be a powerful catalyst for reform among Opec states.

Rabah Arezki and Akito Matsumoto identify the threats to the agreement from non-compliance and rising shale oil output. The agreement may provide a short-term solution for exporters but to achieve sustainable development they need to adjust their growth models, argues Bhavin Patel, drawing attention to the fiscal responses of Gulf states. Other commodities are faring better than oil. Gautam Sashittal advocates the attractiveness of gold as a safe-haven asset during times of uncertainty.

Cedric Mbeng Mezui examines the links between commodity revenues and fiscal policy in Africa, warning against procyclical tendencies that expose external vulnerabilities. John Anyanwu advocates the need for greater state intervention to help lift Africa out of extreme poverty. The scandal associated with oil giant Petrobras risks delaying reform progress in Brazil, writes David Smith.

On Asia, Amando Tetangco, governor of Bangko Sentral ng Pilipinas, explores the reforms needed for the region to avoid the middle-income trap. One possibility is promoting financial infrastructure, where Asia still lags. As Adam Cotter writes, the latest International Monetary Fund reserve asset data show China punching significantly below its economic weight when it comes to the importance of the renminbi. Ikuko Samikawa argues that, under the framework of the fiscal theory of the price level, the Bank of Japan’s adoption of yield curve control may lead to prices at last shifting to a rising trend.

The Federal Reserve appears to be adopting a more activist stance. Darrell Delamaide reflects on Fed officials’ intentions regarding its balance sheet. As documented in the latest book by OMFIF Press, Trump: The First One Hundred Days, the US president may have changed his mind on monetary policy and the Fed. Having argued against the low-rate policy, he now defends it – and he appears to be warmer towards Janet Yellen, the Fed chair. Yet risks for his presidency remain. The Advisers Network was polled on the probability of impeachment. While 69% do not expect Donald Trump to be impeached, some suggested that he might resign.

The second in our series on central banks’ balance sheets, prepared jointly by OMFIF and the National Bank of Poland, looks at the role of political uncertainty in boosting safe haven currencies in Denmark, Sweden and Switzerland. This has raised the foreign exchange component of their balance sheets, a possible threat to monetary stability. John Nugée explores the dilemmas facing central banks in exiting unconventional policies. Paweł Kowalewski and Mikołaj Szadkowski document the declining net financial assets of the European Central Bank, partly linked to lower emergency liquidity assistance to Greek banks. Jeroen Dijsselbloem, the Dutch finance minister, has raised eyebrows with his comments about southern euro area countries ‘wasting money on wine and women’. Nick Malkoutzis takes issue with such talk, and argues that Europe will never understand and solve the euro area’s problems unless creditors shoulder their share of the blame.

In our series of Focus reports on international financial centres we profile Portugal, a country in recovery mode that is steadily becoming a hub for European business services. The UK’s decision to leave the EU may create opportunities for countries like Portugal. At the same time British Prime Minister Theresa May is doing her best to maintain jobs in the UK. David Marsh and Meghnad Desai admire May’s decision to call a general election in June. This should give her the mandate needed to carry through Britain’s exit from the European Union, a decision that she had not supported originally. Many civil servants find themselves in a similar position, experiencing a conflict between commitment to carrying out orders and doing what they believe is good for their country, as narrated in the memoir With Respect, Minister, by Brian Unwin, UK Treasury veteran and former European Investment Bank president, reviewed – with due respect – by William Keegan.

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