JEDDAH — Some countries whose currencies are pegged to the dollar benefit from deflation brought about by the stronger green buck in the same way as American manufacturers do. For instance, Saudi manufacturers can now import raw materials cheaply, so that they can compete with international manufacturers of finished products.
Their profit margins are inversely correlated to the cost of their respective raw materials. For example, the construction industry is a direct beneficiary of the deflation of commodity prices like steel. As a result they will be able to produce their construction projects much cheaper than they had previously forecasted.
The strength of the US dollar can be seen as a stimulus of sorts to those respective industries. The underlying assumption is that the strong dollar is not simply an oil price story, it's a generic commodity deflation story. The fact of the matter is that the Bretton Woods agreement of 1944, has put all commodities and currencies on a US dollar denominated formula. When this denominator rises, the numerator must decline in direct proportion causing deflation. It is this deflation story that has opened a window of opportunity for the international investors to diversify their stake in the Kingdom of Saudi Arabia.
The Tadawul stock market is full of contractors and manufacturers that are primed to benefit from the current global economy. The question that haunts the minds of most economists and investors is "How did we arrive into this strong dollar economy?"
My response is that it was largely a political decision as opposed to an economic decision.The Obama Era is enjoying the strong dollar due to the recent stoppage of QE or quantitative easing.
Basically the Federal Reserve and American economist Janet Yellen stopped the government from buying toxic assets, which were weakening the US dollar.
Suddenly the dollar rose and deflated all commodity prices and currencies. A large number of Multinational Corporations (MNC) like Procter & Gamble have recently released their earnings and they are complaining about the impact of the strong dollar.
The fact of the matter is that there is no need for the Federal Reserve to raise interest rates even further in an endeavor to raise the US dollar.
It came down to an issue of balancing the needs of the "Old Democrat" constituencies, and the needs of the "New Democrat" constituencies. From a historical perspective the economic landscape has made some fundamental changes between the Old Democrats of the "Clinton Era" and the New Democrats of the "Obama Era"
It has been described as an economy that had little–to–no stake in shale oil; therefore, it was not viewed as a commodity driven economy. In fact the economy of the 90's was largely lauded for its growth and innovation in the birth of the Internet.
The Clinton era was also recognized for its high interest rates, strong dollar, and strong growth formula. All commodity prices were deflated as a result of the strong dollar; consequently, the local American manufacturers enjoyed the luxury of high profits due to cheap prices of raw materials.
This economy is fundamentally different in 2015, because it can now be viewed as a commodity driven economy. This is due largely in part to the Bush Era, which laid the groundwork for shale oil drilling in both of his consecutive presidential terms.
The economic impact of the new oil industry can be measured in terms of at least three metrics GDP, jobs growth, and tax revenues.
They have continued to flourish during the Obama administration, to the degree that some Industry analysts were forecasting total independence from foreign oil in the near future.
Then they hit a bump in the road when the financiers of shale oil, and new oil discovery projects began to cry foul. They had to recalculate the viability of the projects with the new discounted cash flow projections showing imminent losses.
The recent fall in oil prices has a number of hedge funds revisiting their bond portfolios as they have declined substantially. The ramifications of these pending defaults has yet to be discussed in the mainstream media.
As a result, the energy sector would like to see a weak dollar and low interest rates, so that their respective commodity prices would rise.
At this juncture we can anticipate a great deal of political lobbying from this industry to salvage their respective businesses.
Of course the economic picture would be incomplete if we didn't mention other segments of the economy, such as the real estate sector. This is yet another sector that tends to be hyper sensitive to the direction of forecasted interest rates.
The real estate sector is also desperately lobbying to keep interest rates low, so that the demand for both the existing homes and new homes on the market can continue to flourish.
— Khalid I. Natto is the chairman and CEO of KIN Consortum