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Middle East

Egypt

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.

24 June 2022

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

20 June 2022

Fed hikes, Egypt’s policymaking, Egypt-Israel-EU gas deal

Central banks in the Gulf followed the Fed in hiking interest rates and further tightening lies in store. But there are reasons to think that the region’s economies will be relatively unscathed by this. The likes of Tunisia and Egypt are more much more vulnerable to global monetary tightening. That said, after devaluing the pound in March, Egyptian policymakers seem to have moved to a more flexible exchange rate regime that will help to absorb strains in the balance of payments. Meanwhile, the EU signed a tripartite gas deal with Egypt and Israel this week that should provide a boost to Egypt’s energy sector over the coming years. 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

16 June 2022
More Publications

OPEC+ fallout, PMIs, Tunisia austerity plans

Last week’s decision by OPEC+ to accelerate the pace at which it is raising its oil production quota will provide a fillip to economic growth in Saudi Arabia and the UAE. Meanwhile, May’s batch of PMIs further highlighted the growing divergence between the Gulf and non-Gulf economies. And finally, an austerity plan announced by Tunisia’s government this week may appease the IMF ahead of talks over a financing package, but passing such measures will be extremely difficult and ultimately Tunisia will continue on the path toward default.

Egypt Consumer Prices (May)

Egypt’s headline inflation rose to a three-year high of 13.5% y/y in May as the lagged effects from the devaluation of the pound in March continued to push up non-food inflation. Inflation will continue to rise over the rest of this year and prompt the central bank (CBE) to hike interest rates further – we have pencilled in 150bp of hikes by the end of this year, to 12.75%, which is more than the consensus expects.

Egypt’s privatisation drive and lessons from history

Egypt’s government is set to kick off its latest privatisation drive later this year, but its track record provides little hope that it will meet targets. The authorities are likely to retain a high degree of control over the economy, holding back Egypt’s long-run growth prospects and raising public debt risks. India Drop-In (8th June, 10:00 ET/15:00 BST): We’ll be discussing India’s growth, inflation and policy outlook in the wake of the RBI’s June meeting, including what to do about the rupee. Register now.

OPEC+ talks, strike in Tunisia, Egypt’s bread subsidies

Reports that OPEC+ may suspend Russia from its oil output deal reinforce our view that the Gulf states will raise production faster later this year. Meanwhile, Tunisia’s largest trade union called this week for a national strike in response to government proposals for cuts to the public sector wage bill, underlining that pushing through fiscal tightening will prove difficult and a sovereign default is almost inevitable. And in Egypt, plans to overhaul bread subsidies have been shelved which will require spending to be restrained in other areas to keep the public finances on a sustainable footing.
We are sending this Weekly one day earlier than usual because Capital Economics’ London office is closed on 2nd-3rd June for the Queen’s Platinum Jubilee celebrations.

Saudi fiscal policy, the IMF in Tunisia and Egypt

Saudi Arabia’s Finance Minister Mohammed al-Jadaan provided hints in comments this week that the fiscal purse strings could soon be loosened if oil prices remain elevated. Elsewhere, officials in Tunisia and Egypt confirmed that talks with the IMF over new lending arrangements are due to get underway soon. Egypt is better placed to secure a deal (if it wants one), but the same cannot be said for Tunisia where President Saied’s growing unpopularity will make passing reforms even more difficult.

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