Middle East and North Africa (MENA) oil-importing countries are showing signs of sensitivity to developments across emerging markets, a report by the Institute of International Finance, a global association of financial institutions, has shown. Higher interest rates from the US Federal Reserve attracting investment to the US coupled with an escalating trade war between the US and China have pushed economies across the globe into crisis, with emerging economies in Latin America, Asia and Africa all seeing their currencies fall along with higher inflation and unemployment. The report, produced by the financial industry group, said non-resident capital inflows to Egypt had also started to slow. While these almost doubled to $43.6 billion in the 2016-17 fiscal year on the back of higher foreign direct investment, disbursement of loans from multilateral organisations, sharp increases in non-resident purchases of Egyptian securities to take advantage of high domestic interest rates, and the issuance of Eurobonds, they are estimated to decline significantly to $35 billion in the current fiscal year. The report says that in the MENA region Tunisia, Egypt and Lebanon are at higher risk of capital flight because they have a higher share of hot money from abroad. In the four months between April and July, $6.2 billion left Egypt on the back of worries over the emerging markets crisis. Hot money is made up of investments that enter markets for the short term seeking the highest interest rates available. They are more sensitive than foreign direct investments to changes in exchange rates and market sentiment. The emerging markets crisis is also causing requested yields on treasury bonds and other investment instruments to spike. Reuters reported this week that Egypt had cancelled an auction of five- and 10-year treasury bonds worth LE3 billion ($167 million), its fourth consecutive cancellation, as the yields requested were between 18.5 and 19 per cent. MENA oil-exporters such as the Gulf Cooperation Council (GCC) countries are showing more resilience to the emerging markets turmoil than other markets around the world, the report said. “Higher oil prices, durable US dollar pegs, relatively low debt levels and ample foreign reserves make oil-exporters less risky and less prone to contagion,” it commented. The report also looked at contagion from the crisis in Turkey that has been exacerbated by souring relations with the US. According to the report, Turkish contagion has thus far been limited in the MENA region, however. “Higher oil prices, pegged currencies in the GCC, low debt, large public foreign assets and a lower degree of integration into global financial markets all make MENA, and particularly the GCC, less vulnerable to global macro events,” the report said. MENA trade exposure to Turkey is also “fairly negligible”, the report said. While both oil-importers and exporters witnessed investment outflows between April and July, “the overall drain of capital is fairly small compared to other emerging markets,” it said. Iran, however, which has large exports to Turkey and Iraq along with substantial imports, has faced a different situation. The report draws attention to the exposure of GCC banks to Turkey, saying that while most GCC banks seem well-capitalised to withstand losses from their Turkish subsidiaries, some have higher compositions of Turkish lira-denominated loans in their portfolios. “Given the sharp depreciation of the lira and the prospects for a rise in non-performing loans, pressure on earnings seems inevitable, but hedging strategies will determine the size of potential losses,” it said. Non-resident capital inflows to MENA oil-importers are expected to decline to $54 billion this year from $67 billion in 2017 as global monetary tightening, higher oil prices and external imbalances put them at risk.
