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Middle East


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

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.

25 April 2022

Egypt FX revenues boost, Tunisia avoids default (for now)

Egyptian officials appear to be hoping for a revival of the tourism sector as part of their strategy to improve the external position, but we still think that the currency will need to weaken further, which may raise concerns about the government's FX debts. Elsewhere in Tunisia, after securing a loan last week, the government managed to make a large Eurobond payment on Tuesday to avoid falling into default. However, we think this only kicks the can down the road and a sovereign default looks inevitable.

21 April 2022
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Who holds frontier markets’ foreign debt?

China and private bondholders have become increasingly important creditors to governments of many frontier markets, including some of those that are now finding themselves in debt distress. This is likely to make any debt restructuring talks more complex and longer which could, in turn, could delay bailouts from the IMF.

Egyptian pound, Kuwait political turmoil, Tunisia election

The Egyptian pound has remained relatively stable since last month’s devaluation, but we think policymakers need to move to a more flexible exchange rate and allow the currency to weaken further. Elsewhere, Kuwait’s cabinet resigned for the fourth time in just over two years which is likely to further weigh on efforts to pass structural reforms. And in Tunisia, President Saied hinted that he may alter members on the electoral commission tasked with overseeing this year’s parliamentary elections. This will further raise concerns of a shift away from democracy and delay a possible IMF deal.

Tunisia heading toward default

Political developments and spillovers from the war in Ukraine have compounded concerns over Tunisia’s public finances and cemented our view that the government will default sooner rather than later. 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

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.

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