Daily Brief: Saudi Aramco Might Be Crossing Its Fingers, But That Travel Rebound Isn’t A Sure Thing

Daily Brief: Saudi Aramco Might Be Crossing Its Fingers, But That Travel Rebound Isn’t A Sure Thing

almost 3 years ago3 mins

Saudi Aramco – the world’s biggest oil company – reported a massive drop in profit for 2020 on Monday, as it continues to grapple with a problem hiding in plain sight.

What does this mean?

Just like its international rivals, Aramco had a hard time in 2020 when demand for and the price of oil went into freefall. Little wonder, then, that its profit for the year plunged 44% compared to the year before. Still, at least the oil giant has kept its word: Aramco announced it’ll pay investors $75 billion in dividends just like it promised it would, and even borrowed money to make sure it could afford it. That might be because the company’s feeling upbeat about the future: it reckons oil production levels will be back to normal by the end of the year.

Declining oil prices and output hit Aramco's income

Why should I care?

For markets: The pick of the oil titans?

Aramco’s bottom line is actually a lot more resilient than the average oil company’s: it has less debt than its rivals, as well as the lowest production cost for a barrel of oil. And since 98% of its shares are owned by Saudi Arabia, it hasn’t fallen victim to the same wild price swings either: its home country doesn’t buy and sell the stock, but instead just fills its coffers with its dividends. That steady income is a big draw for other investors too – as long as they can get past the country's environmental, social, and governance issues.

The bigger picture: Everyone guesses.

For all Aramco’s optimistism, a travel rebound isn’t a sure thing. In fact, investors sold off shares in European airlines and other travel companies on Monday, amid fears that rising coronavirus cases across the continent will end vacation season before it’s even begun. And to think, it was only last week that they were sending those stocks to all-time highs in hopes they’d benefit most from the economic recovery…

Paring gains

Keep reading for our next story...

The Turkish Lira Plunged To A Near-Record Low

Turkey image

The Turkish lira plunged to a near-record low on Monday after the government fired the chief of the country’s central bank over the weekend.

What does this mean?

The prices of goods and services have been rising rapidly in Turkey for a while now, with the country’s latest inflation rate sitting just above 15%. To fix that, the central bank’s chief has been hiking interest rates in an effort to discourage spending and cool off the country’s overheated economy. And even though that thinking is in line with almost all modern economic theories, the government disagrees: it says higher interest rates will actually lead to higher inflation.

Is tightening already over in Turkey

So after another bigger-than-expected rate hike on Thursday, the Turkish government finally decided enough was enough: it replaced the central bank’s chief for the third time since 2019.

Why should I care?

For markets: This crash will be felt across Europe.

Any confidence investors might’ve had in Turkey is all but gone: they’ve been selling off the country’s bonds and stocks, and they sent the lira down 15% versus the US dollar. In fact, investors seem to think another currency crisis – like the one in 2018, when the lira fell 34% against the dollar – could be on the cards. And Turkey’s not the only one feeling edgy: European banks like BBVA, UniCredit, and BNP Paribas might struggle to get repaid by their Turkish clients, and investors sent their stocks down by as much as 6%.

Timeline of lira's decline

The bigger picture: Will emerging markets follow?

Turkey is considered an emerging market (EM), and what affects one often affects them all. That might be why other EM currencies fell in value during Turkey’s 2018 currency crisis, and why there are concerns that history will repeat itself now. But that’s not necessarily likely: 2018’s crisis was at least in part down to globally significant US sanctions, while this time the government’s actions were – *looks up technical term* – nuts.

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