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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

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

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
More Publications

S&P Global PMIs (Apr.)

April’s batch of whole economy PMIs showed a loss of momentum at the start of Q2 but continued to highlight the growing divergence between the Gulf and non-Gulf economies as a result of the spillovers from the war in Ukraine. China Drop-In (12th May, 09:00 BST/16:00 SGT): Join our China and Markets economists for a 20-minute discussion about near to long-term economic challenges, from zero-COVID disruptions to US-China decoupling. Register now.

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.

N. Africa gas deals, Gulf tightening, Lebanon and the IMF

Europe’s plans to wean itself off Russian gas could benefit producers in North Africa – and Egypt in particular. Elsewhere, stronger inflation in MENA and rate hikes by the Federal Reserve have prompted central banks across the region to embark on tightening cycles, which will add to economic headwinds. And finally, the news in Lebanon that none of the pre-conditions for receiving IMF funding will be passed until after next month’s general election has poured cold water on hopes for financial support for the country.

Whole Economy PMIs (Mar.)

March’s batch of whole economy PMIs were a mixed bag but further highlighted that the spillovers from the war in Ukraine are driving a divergence between the Gulf and non-Gulf economies. Emerging Markets Drop-In (7th April, 10:00 EDT/15:00 BST): Join us on Thursday for our next monthly Emerging Markets briefing where our economists will discuss how the Ukraine war’s spillovers are helping and hurting EMs, and the impact of global central bank tightening. Register here

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