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Middle East

Morocco

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

Three positive stories from frontier markets

There has been plenty of doom and gloom surrounding the outlook for frontier economies over recent months, particularly Sri Lanka and Tunisia. But there are some places where we hold more upbeat views. Frontier economies in the Gulf will benefit from high oil prices, while manufacturing should drive strong growth in Morocco and Vietnam.

12 May 2022
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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.

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.

Iran nuclear deal, wiring shortage a fillip to North Africa

The Iran nuclear deal appears to be on the brink of being revived and, were that to happen, the lifting of sanctions would provide a major direct boost to Iran’s economy. Increased oil output could add a little more downwards pressure on global oil prices. Elsewhere, the war in Ukraine has hit Europe’s auto sector as shortages of vehicle wiring harnesses are now harder to source. Morocco and Tunisia are both major producers (and key exporters to the EU) of these harnesses and could stand to benefit over a longer horizon if supply chains move away from Ukraine.

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