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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

Monetary tightening stepped up

A majority of central banks in the region hiked interest rates over the past month. In the Gulf, central banks raised interest rates in line with the Federal Reserve, although this won’t necessarily curb demand in the region. Credit growth tends to strengthen during periods of high oil prices. Elsewhere, central banks in Egypt and Tunisia raised interest rates by 200bp and 75bp respectively this month with officials pinning the moves on stronger inflation. But we think that policymakers also have one eye on shoring up deteriorating balance of payments positions and easing pressure on their respective currencies. Further monetary tightening is likely in both countries.

26 May 2022

Pockets of public debt vulnerability

Tighter global monetary conditions and spillovers from the war in Ukraine have caused public debt problems to worsen in several emerging markets, and the MENA region is not immune to this. Within the region, Tunisia’s public debt position is most fragile and the government now faces a ballooning subsidy bill. We think that a debt restructuring will ultimately needed. Elsewhere, the devaluation of the Egyptian pound has coincided with concerns about the growing share of public debt that is denominated in FX. Of course, in the Gulf, high energy prices will provide a significant boost to public finances this year. We’re more concerned about private sector debts, particularly in Dubai. With the Dubai World Expo now over, there’s a growing risk of overcapacity in key sectors that could make debt servicing more difficult.

28 April 2022
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Gulf leads the way as Ukraine war drives divergence

The Gulf economies will be major beneficiaries from higher energy prices and our growth forecasts sit far above the consensus. Outside the Gulf, higher inflation and tighter fiscal policy will weigh on growth, while balance sheet problems are likely to build. In Egypt, despite the recent devaluation, we think the currency will need to weaken further in order to stabilise the external position. One consequence is that interest rates will be raised – and by more than most expect. Elsewhere, we think that Tunisia’s government will ultimately turn to default.

External strains building in North Africa

The Gulf stands to benefit from the war in Ukraine. Oil output is likely to be raised more quickly, while higher energy prices will boost export revenues by around 10% of GDP this year, providing some scope for fiscal loosening. In contrast, most of the non-Gulf economies will see current account positions deteriorate. Egypt responded to these strains by (finally) devaluing the pound this month, while Tunisia is facing growing pressure on its currency, which makes a sovereign default increasingly likely.

Regional divergence to widen on back of Ukraine war

The spillovers from the war in Ukraine will further drive divergence in economic growth across the Middle East and North Africa. The Gulf economies stand to benefit as oil production is likely to be raised more quickly which, combined with higher oil prices, will probably prompt some governments to loosen fiscal policy. Outside the Gulf, however, higher commodity prices will push up inflation and policymakers will probably have to step up fiscal consolidation efforts. Commodities Drop-In (24 March, 11:00 EDT/15:00 GMT): Our Commodities team will be exploring how the war in Ukraine is shaking up commodity markets, from oil to wheat, while tackling some of the big market questions – not least whether we’re in for 1970s-style oil supply shocks. Register here.

Energy markets present upside risk to the Gulf

The Gulf economies are key beneficiaries from the rise in energy prices caused by the Russia-Ukraine crisis. On an annualised basis, oil at $100pb would increase hydrocarbon export revenues by 7-10%-pts of GDP across the Gulf (relative to 2021). This could open the door for officials to loosen fiscal policy and support non-oil sector recoveries. Meanwhile, we think that OPEC+ will stay the course and raise its production quota by 400,000bpd on Wednesday, which will further benefit the Gulf as higher oil output will strengthen GDP via higher mining output. If anything, global energy prices are likely to rise further if the conflict continues to escalate and the Gulf producers may ramp up output more quickly to stabilise the oil market. These present upside risks to our GDP growth forecasts across the region. EM Drop-In (Thur. 3 March, 15:00 GMT): We’re discussing the impact of Russia-Ukraine on emerging markets in a special 20-minute briefing this Thursday. Registration details.

Global monetary tightening a challenge for MENA

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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