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US$ bn<br />
US$ bn<br />
India<br />
Strategy Note | January 1, 2019<br />
Figure 10: IMF data shows how GCC countries have progressed<br />
in the past few years as well as how vulnerable they still are to<br />
oil price shocks<br />
Figure 11: The table below indicates the vulnerability of the GCC<br />
countries to an oil collapse and their need for large US$<br />
reserves<br />
SOURCES: CGS-CIMB RESEARCH, Lighthouse research, IMF data<br />
SOURCES: CGS-CIMB RESEARCH, https://www.brookings.edu/research/sustaining-the-gcccurrency-pegs-the-need-for-collaboration/<br />
Despite the rhetoric and trade wars, the US’s overall trade<br />
deficit has not come down<br />
Figure 12: US’s trade deficit has not come down. Although curbs on H1B visas may<br />
have resulted in increased services exports, overall trade deficit still increased by<br />
~10% (YTD Oct18)<br />
0<br />
-100<br />
-200<br />
CY16 till Oct CY17 till Oct CY18 till Oct<br />
226<br />
230<br />
225<br />
220<br />
-300<br />
215<br />
-400<br />
-500<br />
-600<br />
-412<br />
208<br />
-451<br />
212<br />
-503<br />
210<br />
205<br />
-700<br />
-620<br />
-664<br />
200<br />
-800<br />
-729<br />
195<br />
Total ( LHS) Goods ( LHS) Services( RHS)<br />
SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS<br />
The need to de-risk (politically as well as economically) from<br />
US$ is high for GCC and developing countries<br />
GCC as well as countries which own ~US$6tr worth of US government bonds<br />
are prone to political risks in the US. More so after the recent attempt by<br />
President Trump to browbeat the Federal Reserve. The US’s fiscal deficit is<br />
being financed by two key sources:<br />
● The global reserve of US$ which emanates from the US trade deficit/petrol<br />
dollars; and<br />
● The de-facto status of the US$ as the premier trading currency, which comes<br />
from the world’s deep faith in the Federal Reserve.<br />
These two factors keep the dollar demand high and strong. Also, there is<br />
widespread trust in the free trade practices of the US. This is why, despite all the<br />
fundamentals, the US enjoys the best credit rating and its bonds have a “safe<br />
haven” status. However, this trust is fragile, and if it were to break it would spell<br />
doom for the US. As such, it is not a surprise that most countries are doing their<br />
bit to de-risk from the US$.<br />
5
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