NOVEMBER 30, 2014
Budget 2015: A LOOK AT THE LATEST BUDGET
DUBAI COLLEGE
Fracking - a sustainable energy source?
Investment flows from China to Russia
In the UAE
DC ECONOMICS BUDGET 2015 Pre-election budgets have always traditionally had large scale giveaways to act as sweeteners for the electorate. However this year did not follow the trend, with the chancellor opting for several smaller giveaways. Coming out of the deepest recession in recent memory, the chancellor wanted to continue his façade of credibility which he has managed to maintain throughout his term as chancellor. It seems surprising that his approval ratings have been on an upward trend despite his failure on eliminating the budget, which is still running at 90 billion pounds a year. Not only that, but as chancellor, Osborne has overseen the longest fall in real term living standards in history. So what did he implement in this year’s budget to try and continue the trend of increasing approval ratings and further reduce the budget. His big ticket item in the budget as it was last year, was aimed at appeasing savers. This isn’t surprising considering vociferous voices calling for more support for savers following record low interest rates at 0.5% which haven’t helped. Not only this, but as is almost tradition now in pre-election budgets, parties are trying to gain the grey vote, as often it is the oldest in society who seem more likely to head to the ballot box. One measure aimed at helping savers was that the first £1000 of interest on savings will now be tax free, and the annual savings limit for an ISA has increased by £240 to £15240. However not all the measures introduced were aimed at older voters, with the introduction of a new Help to Buy ISA. Up to a limit of £3000, the government will now top up by £50 every £200 saved for a deposit for a first time buyer, aiming to solve the problem of so many young people finding it almost impossible to get their first step onto the housing ladder. However, whilst this may help in that many young people struggle to save for a deposit, he failed to address the chronic failure by the government where they have failed to build enough affordable homes, and the lack of supply has led to spiralling prices leaving many young people forced onto the private rental market. All that was announced in last week’s budget may not be implemented, as it all greatly depends on who is in Downing Street following May 7th. And with the uncertainty surrounding the upcoming general election, who knows where the British economy is heading over the coming years, only time will tell. Raahim Zafarullah
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NOVEMBER 30, 2014
FRACKING - A SUSTAINABLE ENERGY SOURCE FOR THE US? Hydraulic fracturing is regarded as one of the primary methods of unconventional oil and gas extraction in the US. Proponents of fracking highlight the economic benefits that accompany domestically generated energy which include lower energy prices for consumers, reduced dependency on other countries, increased government tax revenue and job creation. Globally, fracking has created 2.5 million "frac jobs" with over one million of those in the US alone. Mark Perry, a professor of finance and business economics at the School of Management, in the University of Michigan-Flint has described the shale revolution as the energy equivalent of the “Berlin wall coming down’’. North Dakota exemplifies the economic growth generated by fracking where oil and gas extraction taxes account for 50 percent of all taxes collected by the state. In 2012, higher oil and gas revenues produced a $600 million surplus and the state expects to collect nearly $7.5 billion in oil and gas tax revenue by the end of this year. But despite the visible benefits of fracking to the American economy, countries like France and the UK still stand strongly against it. Environmentally, there are concerns about the impacts of fracking on wild life and human health. The US Government’s Environmental Protection Agency states the 35,000 oil and gas wells operating in the fracking industry use up to 140 billion gallons of water each year. Furthermore, an amalgamation of chemicals is added to water in the fracking process; consequently, most of it is not recycled despite the fact that fracking is most intensive in states prone to water shortages such as Kansas and Oklahoma. Billions of dollars have already been sunk into the fracking industry leading detractors to question its financial foundation considering the majority of companies are drilling against considerable levels of debt in the hopes of generating enough oil and gas to export at higher prices to Europe and China. Moreover, some analysts say production is already demonstrating signs of peaking causing speculation over a bubble that may soon burst thereby endangering both America’s energy sector and its financial system. Sara Kachwalla
INVESTMENT FLOWS IN FROM CHINA TO RUSSIA Following a combination of unfortunate triggers for Russia including a drastic drop in oil prices and the uncertainty over Ukraine, Russia’s economy has been in decline ever since December 2014. Currently, Russia could be on the brink of a recession unless investment starts to flow. Even though the Rouble has made a major comeback from the dire straits it was in in December 2014, authorities are skeptical as to
DUBAI COLLEGE
Recent News Headlines That Have Caught Our Eye… ‣ Polls show that four parties are in close competition for first place in the forthcoming Spanish election, with anti-establishment ‘Podemos’ polling narrowly ahead. ‣ US consumer prices rebounded last month as petrol prices rose for the first time since June. ‣ The UK's recession ended six years ago but only now are earnings starting to recover. Real earnings grew for the fourth consecutive month in January and at their fastest pace since April 2008.This improvement has happened mainly because of sharply lower food and energy prices, rather than because of a recovery in wages. Nominal wage growth has been pretty stable around the 1.8% mark since October, while inflation has dropped from 1.3% to a record low of 0.3% in January.
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NOVEMBER 30, 2014
DUBAI COLLEGE
how long the currency can stay strong which is why Russia has begun to try and pull in investment. Investment into Russia was made mainly of Western countries, namely the US. There has recently been a drop of about $50 billion in investment from the West and because Russia is not able to sustain themselves independently, they were forced to turn to China. As a result, a Russia-China investment fund (RCIF) has been set up in order to boost investment in Russia and relations between the two countries. This fund should encourage partnerships between Russia and China in terms of setting up businesses to allow economic cooperation. Vladimir Kolychev, chief economist for Russia stated that “Chinese investment will be given even more priority by the government now.” The deals that have been agreed between the two countries are already breaking records and making the news. For example, China National Petroleum Corp signed a deal with Russia that was worth $270 billion. Some of these deals don’t necessarily show up in the FDI data but are still helping a great extent in pushing Russia’s economy forward. In addition, the future looks even more promising for Russia because the government is dedicated to promoting investment by taking measures such as cutting taxes – 13% income tax, 20% corporate tax and by increasing competitiveness by encouraging entrepreneurs to set up their own businesses. Anurati Sodani
IN THE UAE: What does 2015 hold for Dubai Real Estate? 2015 began with increased uncertainty facing the Dubai real estate sector. The major dampening factor of the real estate market over the past few months has been concerns of the negative impact of lower oil prices on the Dubai economy and therefore the city’s real estate market. While cheaper oil prices are likely to prove positive for the global economy, they will clearly reduce government revenues in the UAE. However, Dubai’s success at diversifying its economy and the continued growth of non-oil sectors makes it less vulnerable to lower oil revenues than other GCC oil exporters. Another reason for the slowdown in the real estate market is due to a weakness in investor demand due to the perception that the market has reached its peak after a period of strong growth and tighter regulatory measures announced in late 2013 aimed at curbing speculation. Propensity for investing in Dubai is at a five-year low. In other news, most Gulf stock markets fell in trade earlier this week while Dubai’s index, edged down 0.4 percent. The construction company Arabtec fell 6.5 percent and was the main drag on Dubai’s index. Arabtec’s shares are among the most traded on the Dubai stock market - the company posted an unexpected fourth-quarter loss of AED94.4 million ($25.7 million), blaming non-recurring general and administrative expenses. Arabtec aside, the market was generally positive after oil extended its rebound last weekend. Ashna Gupta
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