October 2017

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Is Saudi Arabia’s Oil Strategy Working?

The IMF estimated that Saudi Arabia will need oil prices to trade at about $70 per barrel in 2018 for its budget to breakeven, a dramatic improvement from the $96.60 per barrel it needed just last year. Saudi’s improvement is the most dramatic out of all the Middle Eastern oil producers, and it also suggests the combination of austerity, cuts to wasteful subsidies, new taxes and economic reforms are starting to bear fruit. The improvement is all the more important because Saudi Arabia and its fellow OPEC members are restraining output as…

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A Few Simple Charts Spell Disaster For Public Pension Ponzi Schemes

Earlier today, Milliman released their 2017 Public Pension Funding Study which explores the funded status of the 100 largest U.S. public pension plans.  Not surprisingly, this study only served to confirm many of the rather alarming trends surrounding public pension ponzi’s that we discuss on a regular basis.

Starting with a high-level status update, Milliman figures the largest 100 public pensions were roughly just as underfunded on June 30, 2017 as they were on June 30, 2016…not an encouraging development given that the S&P 500 surged 15% over that same period.

This 2017 report is based on information that was reported by the plan sponsors at their last fiscal year ends—June 30, 2016 is the measurement date for most of the plans in our 2017 study. At that time, plan assets were still feeling the effects of market downturns in 2014-2015 and 2015-2016. Total plan assets as of the last fiscal year ends stood at $3.19 trillion, down from $3.24 trillion as of the prior fiscal year ends (generally June 30, 2015). However, market performance since the last fiscal year ends has been strong, and we estimate that aggregate plan assets have jumped to $3.44 trillion as of June 30, 2017. We estimate that the plans experienced a median annualized return on assets of 11.49% in the period between their fiscal year ends and June 30, 2017.


The Total Pension Liability reported at the last fiscal year ends totaled $4.72 trillion, up from $4.43 trillion as of the prior fiscal year ends. We estimate that the Total Pension Liability has increased to $4.87 trillion as of June 30, 2017. The aggregate underfunding as of the last fiscal year ends stood at $1.53 trillion, but we estimate that the underfunding has narrowed to $1.43 trillion as of June 30, 2017.

Meanwhile, 32% of the top 100 plans were less than 60% funded.

Of course, the discussion gets far more interesting when Milliman analyzes the prevailing discount rates used by public pensions compared to independent analyses of where those discount rates should be set. 

As our readers are well aware, we’ve long argued that public pension funds essentially hide their true funding status by simply choosing artificially high discount rates for future liabilities thus making their present values appear lower than they actually are.  It’s a clever scam but one that can only persist until the ponzi runs out of cash.

As Milliman notes, the median expected return of the 100 largest public pension funds in the U.S. is somewhere around 5.9% based on the asset allocations of those funds.

That said, you can imagine our shock to learn that 83 of the top 100 funds used discount rates in excess of 7%.

So, what does that mean?  Well, Milliman figures that overstating a fund’s discount rate by just 1% artificially reduces it’s benefit liability by up to 15%.  Therefore, given that the aggregate liabilities of the top 100 funds are roughly $5 trillion, each 1% adds about $750 billion in liabilities.

A relatively small change in the discount rate can have a significant impact on the Total Pension Liability. How big that impact is depends on the makeup of the plan’s membership: a less “mature” plan with more active members than retirees typically has a higher sensitivity to interest rate changes than a more mature plan with a bigger retiree population. Other factors, such as automatic cost of living features, also come into play in determining a plan’s sensitivity. Using a discount rate that is loo basis points higher or lower than the independently determined investment return assumption moves the aggregate recalibrated Total Pension Liability by anywhere from 8% to 15% (see Figure 13).

Adding insult to injury, Milliman notes that the ratio of retired pensioners (those taking money out of the system) to active pensioners (those still funding the ponzi) has surged 16% over the past couple of years. 

Of course, this ratio is only going to get worse over the coming decade as a wave of Baby Boomers retire…unfortunately, that wave of retirements will result in many of them finally realizing they’ve been sold a retirement fantasy for their entire life.

Here is the full study from Milliman:

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Venezuela’s Grim Reaper: A Current Inflation Measurement – Current Annual Rate 2875%

Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke.

The Grim Reaper has taken his scythe to the Venezuelan bolivar. The death of the bolivar is depicted in the following chart. A bolivar is worthless, and with its collapse, Venezuela is witnessing the world’s worst inflation. 

As the bolivar collapsed and inflation accelerated, the Banco Central de Venezuela (BCV) became an unreliable source of inflation data. Indeed, from December 2014 until January 2016, the BCV did not report inflation statistics. Then, the BCV pulled a rabbit out of its hat in January 2016 and reported a phony annual inflation rate for the third quarter of 2015. So, the last official inflation data reported by the BCV is almost two years old. To remedy this problem, the Johns Hopkins – Cato Institute Troubled Currencies Project, which I direct, began to measure Venezuela’s inflation in 2013. 

The most important price in an economy is the exchange rate between the local currency and the world’s reserve currency — the U.S. dollar. As long as there is an active black market (read: free market) for currency and the black market data are available, changes in the black market exchange rate can be reliably transformed into accurate estimates of countrywide inflation rates. The economic principle of Purchasing Power Parity (PPP) allows for this transformation.

I compute the implied annual inflation rate on a daily basis by using PPP to translate changes in the VEF/USD exchange rate into an annual inflation rate. The chart below shows the course of that annual rate, which last peaked at 3473% (yr/yr) in late October 2017. At present, Venezuela’s annual inflation rate is 2875%, the highest in the world (see the chart below).

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Saudi Cabinet reaffirms support to Yemen’s legitimate govt

Wed, 2017-11-01 03:00

RIYADH: The Saudi Cabinet on Tuesday applauded the recent statement issued by the foreign ministers and chiefs of staff of the Coalition to Support Legitimacy in Yemen.
The weekly meeting was chaired by King Salman at Al-Yamamah Palace in Riyadh.
The king began the session by briefing attendees on the outcome of his talks with Sudanese President Omar Al-Bashir and former French President Nicolas Sarkozy.
That statement on Yemen explained that the coalition, established in accordance with UN Security Council Resolution 2216, was a response to the legitimate Yemeni government’s appeal against militias attempting to overthrow it.
The statement went on to condemn Iran for supplying the Houthi insurgents with weapons and ammunition, as well as holding Iran and its proxies responsible for endangering the security of the region.
The Cabinet also hailed the efforts being exerted by the Presidency of State Security to discover and prevent the financing of terrorism, in addition to its recent naming — in partnership with the Terrorist Financing Targeting Center (TFTC) — of two entities and 11 individuals identified as leaders, financiers, facilitators or supporters of Daesh in Yemen and Al-Qaeda in the Arabian Peninsula.
The Cabinet also expressed the Kingdom’s strong condemnation and denunciation of the terrorist bombing of a bus transporting police in Bahrain and of two car bombs in the Somali capital Mogadishu, which resulted in dozens of deaths and injuries.
The Cabinet reaffirmed its solidarity with Bahrain and Somalia, and wished the wounded a quick recovery.
The Cabinet lauded Crown Prince Mohammed bin Salman’s speech at the recently concluded Future Investment Initiative (FII) in Riyadh, where he said that the will, determination and principles of the Saudi people have helped lift the Kingdom to new levels of development and progress.
Culture and Information Minister Dr. Awwad Al-Awwad said in a statement to the Saudi Press Agency (SPA) after the Cabinet session that the Cabinet was delighted with the regional and global response to the crown prince’s announcement of the NEOM Project.
The high-tech project, billed as a regional Silicon Valley, embodies the Kingdom’s ambitious economic vision, as outlined by Vision 2030, and its desire to transform into a pioneering global role model.
The Cabinet pointed out that Vision 2030 will support the stability of the region in general, as well as confirming the Kingdom’s status as the heart of the Islamic world. That vision, the Cabinet explained, was a response to the Kingdom’s internal development requirements and the need to create a multi-source economy.
To that end, the Cabinet also lauded the program launched by the Public Investment Fund for 2018-2020, which includes 30 initiatives that will help to diversify the Kingdom’s economy.

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Saudi Arabian Military Industries announces new CEO and board

Wed, 2017-11-01 03:00

RIYADH: The Saudi Arabian Military Industries (SAMI) has announced the formation of the company’s board of directors, chaired by Ahmed Al-Khatib, as well as appointing Andreas Schwer as chief executive for his solid experience in establishing and managing global defense companies.
“I am honored to chair this new national company, which will play a key role in diversifying the country’s economy according to Vision 2030,” Al-Khatib said.
The company’s board of directors includes Energy Minister Khalid Al-Falih and Prince Faisal bin Farhan Al-Saud, a senior adviser to the Saudi ambassador to the US, in addition to three international experts who will join the board of directors at a later date.
SAMI’s appointment of government officials to its board as well as experts from diverse backgrounds highlights its commitment to localizing 50 percent of the country’s military expenditure by 2030, thus creating more job opportunities for Saudi citizens.
Schwer, who will join SAMI in December 2017, is the chairman and CEO of Rheinmetall International, which employs 6,000 people with revenues of $1.5 billion. Before joining Rheinmetall he held several senior executive positions at Airbus.
SAMI aims to create 40,000 jobs and contribute SR14 billion ($3.7 billion) to the Saudi economy by 2030.
SAMI also signed an MoU with Russian arms exporter Rosoboronexport to buy S-400 surface-to-air missile systems and other weapons during a recent visit to Moscow by Saudi King Salman.
SAMI has recently signed memoranda of understanding with a number of the world’s largest defense contractors, including Boeing, Lockheed Martin, Raytheon, General Dynamics and Rosoboronexport.
The company is following a clear strategy that supports its goal to become one of the world’s largest 25 defense companies by 2030.

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Saudi Arabia ranks 2nd in world’s high-income countries for business reforms for 2018

Wed, 2017-11-01 03:00

JEDDAH: Saudi Arabia has made unprecedented progress in helping to ease business and boost investor confidence, according to a world report.
The Kingdom is among the top 20 countries in the world, and second among the most high-income in G-20 countries, at making reforms to improve the business climate, a World Bank Group report said.
Saudi Arabia’s progress in ease of doing business for 2018 excelled in six of 10 axes: Protecting minority investors, enforcing contracts, starting a business, cross-border trade, registering property and settling bankruptcy, the report added.
The Kingdom’s strong reforms have led to progress in protecting the minority shareholders, ranking 10th in the world, which is a strong signal to those interested in investing in the Kingdom, according to the report.
The reforms also included facilitating payment of taxes by improving the electronic filing system to raise tax returns and pay taxes. It reduced the number of hours required to pay taxes from 67 to 47 hours, the report highlighted.
The Kingdom has also facilitated cross-border trade by reducing the number of documents required for customs clearance, reducing the processing time required by nine days for exports (from 90 days to 81 days) and imports (from 131 days to 122 days), the report stated.
One of the other reforms undertaken by the Kingdom has been to improve efficiency of the land management system by simplifying registration procedures.
This is the first time that the Kingdom has achieved reforms in six axes in one year. It had only four reforms in 2009 and 2011.
All those results were achieved through “Taysir”, a committee for improving performance of business in the private sector.
The committee works in accordance with an integrated vision with relevant government agencies to facilitate procedures ensuring efficiency and facilitate the business practice to improve rank in the indexes of ease of doing business and improve the Kingdom’s ranking in the Global Competitiveness Report.
The committee was formed upon a decision issued by the Economic and Development Affairs Council and headed by Majed bin Abdullah Al-Qassabi, minister of commerce and investment. The committee aims to set up a plan improving performance of businesses in the private sector and motivating them to participate in the economic development in accordance with the Kingdom Vision 2030.
The committee seeks to improve laws and regulations that stimulate the business environment in the Kingdom.

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