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Lebanon and devaluation: a bitter medicine?

Pressure is growing on Lebanon’s dollar peg and, in the event of a devaluation, the pound could fall by as much as 50% against the dollar. A messy sovereign default and a deep recession would follow. But over a longer horizon, a more competitive currency is part of the solution to the economy’s poor performance over the past decade.
Jason Tuvey Senior Emerging Markets Economist
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Middle East Chart Book

Region’s financial markets routed

Risk-off sentiment and the sell-off in EM financial markets have hit the Middle East and North Africa hard. Having been the top regional performer earlier in the year, the MSCI Arabian Markets Index has fallen by nearly 20% since mid-April. Sovereign dollar bond spreads have widened across the board, particularly in Egypt and in Tunisia – the latter appears to be hurtling toward a default. With developed market central banks set to deliver more hikes over the rest of this year and next, we suspect that equities in the Middle East and North Africa (and EMs more generally) will continue to struggle. Meanwhile, sovereign dollar bond spreads could widen further, and currencies in North Africa are likely to come under greater pressure.

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Next Thursday's OPEC+ meeting may drop some hints about the future for the group's oil output beyond September and we think that quotas are likely to be lifted. If that’s the case, the Gulf economies would be major beneficiaries. Elsewhere, comments from Egypt’s finance minister suggest that officials are becoming more receptive to a weaker pound, adding to hopes that the move to a more flexible exchange rate is the real deal. A weak currency is a concern given the growing sovereign FX debt burden, but the country’s FY2022/23 budget passed this week does at least highlight a commitment to fiscal austerity.

23 June 2022

Middle East Economics Update

Egypt public finance risks contained… for now

Egypt’s public debt dynamics look increasingly fragile due to a combination of the extremely short average maturity of its debt, rapidly rising yields, and a growing share of debt denominated in foreign currency. That said, for now, there are reasons to think that the sovereign should be able to muddle through. World with Higher Rates - Drop-In (21st June, 10:00 ET/15:00 BST): Does monetary policy tightening automatically mean recession? Are EMs vulnerable? How will financial market returns be affected? Join our special 20-minute briefing to find out what higher rates mean for macro and markets. Register now

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More from Jason Tuvey

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Iran: nuclear deal, elections and the economy

Negotiators appear to be closing in on an agreement to revive Iran’s nuclear deal which, if revitalised, would provide a substantial lift to Iran’s economy – it could plausibly expand by 8-10% per year in 2021-23. Higher Iranian oil output would act as a drag on global oil prices and could prompt governments in the Gulf countries to keep fiscal policy tight, weighing on their recoveries.

7 June 2021

Emerging Europe Economics Weekly

Erdogan piles on the pressure, Israel’s surprise coalition

Talk this week of rate cuts in Turkey has led to further falls in the lira and, ironically, means that the central bank will stand pat at this month's MPC meeting. In Israel, the coalition proposal formed to topple incumbent PM Benjamin Netanyahu is so fractured we don't think it will lead to major changes in economic policy. Finally, the announcement by Russia's government to de-dollarise its National Wealth Fund assets won't have an economic impact, but it is a clear move ahead of the Biden-Putin summit this month that Russia sees its future as isolated from the West.

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Emerging Europe Data Response

Turkey Consumer Prices (May)

The latest falls in the lira mean that, despite the fall in Turkey’s headline inflation rate to 16.6% y/y last month, the central bank (CBRT)will probably leave interest rates unchanged at this month’s MPC meeting. But the CBRT is likely to fulfil the president’s desire for monetary loosening by August.

3 June 2021
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