Central banks in the Gulf will have to raise interest rates in line with the Fed (which we expect to hike four times both this year and next) by virtue of their dollar pegs, adding to headwinds facing non-oil sectors. Outside the Gulf, the main risk is that external financing conditions tighten sharply as major DM central banks raise interest rates. Tunisia’s external position is among the worst in the emerging world and downward pressure on the dinar would further increase the risk of a sovereign default given the country’s large FX debts. Elsewhere, Egypt’s widening current account deficit is a cause for concern. We expect a gradual depreciation of the pound but, if policymakers keep the currency steady for longer, a sharper and larger downward adjustment will eventually be needed.
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