Capital flows return to emerging markets in September after August exit: CBE

Direction of capital movement remains dependent on future outlook of economic activity growth rates, development of global trade tensions

The Central Bank of Egypt (CBE) said that emerging markets witnessed a continuous return of capital flows in September 2019, following a temporary exit in August.
The CBE, in its monetary policy report issued on Tuesday, stated that the return of capital flows to emerging markets during 2019 came after it witnessed an eleven-months exit between February 2018 and December 2018, supported by the impact of the monetary policy direction on the economies of developed countries.
It pointed out, however, that the direction of capital movement remains dependent on the future outlook for the rate of growth of economic activity in addition to the development of global trade tensions.
The CBE said that net foreign assets of commercial banks continued to improve during the second quarter (Q2) of 2019, second in a row.
The decrease in net foreign direct investment continued on an annual basis during the Q2 of 2019, for the fourth consecutive quarter.
The CBE indicated that these developments came mainly as a result of higher outflows, despite the improvement in inflows on an annual basis, which recorded the highest rate since the Q4 2016. At the same time, the net foreign exchange reserves of the CBE rose slightly to record $45.1bn in September 2019, after having generally stabilised at $44.9bn in July and August 2019.
It said the decline in the financial account surplus continued during the Q2 2019, after surplus increased in the Q1 2019.
The CBE report pointed to the continued positive shift in investor perception of emerging markets since the beginning of 2019 to support the continuation of net investment flows in the foreign securities portfolio in Egypt during the Q2 2019 for the second quarter in a row, but at a lower rate compared to the previous quarter. The success of the Ministry of Finance in issuing international bonds during the Q2 2019 also supported the continuation of net investment flows in Egypt's foreign securities portfolio despite the decrease in the size of issuance and surplus services settling on an annual basis during Q2 2019, after it recorded an improvement for the eighth consecutive quarter in Q1 2017 and Q2 2018.
This comes as remittances from workers abroad continued to decline on an annual basis during the Q2 2019, for the third consecutive quarter. Despite this, the annual decline rate decreased during the Q2 2019, for the second consecutive quarter.
The petroleum trade balance continued to improve on an annual basis during Q2 2019, for the sixth consecutive quarter, to record a surplus for the second time since Q3 2013.
This was mainly supported by the decrease in the volume of imports and the increase in the volume of exports, despite the decrease in world oil prices on an annual basis during Q2 2019, for the second consecutive quarter.
The improvement came mainly supported by a surplus in net natural gas exports since Q4 2018, while net imports of oil products continued to decline, mainly supported by the state's fiscal reforms and improved domestic refining activity, which in turn mainly supported the stability of net oil exports.
The non-oil trade balance deficit improved on an annual basis during Q2 2019, for the first time since Q3 2017.
While the contribution of exports improved, the non-oil trade balance deficit betterment was mainly supported by a decrease in imports, especially imports of intermediate goods, for the first time since Q2 2017, after imposing custom duties on iron imports in April 2019.
At the same time, the net deficit in exports of goods and services continued to improve on an annual basis during Q2 2019, after rising during Q1 2019, for the first time since Q4 2016. This was mainly driven by an improved non-oil trade balance deficit.
The current account deficit continued to increase on an annual basis during Q2 2019 for the third quarter in a row, but at a lower rate compared to the previous quarter, after it recorded an annual improvement for the seventh quarter in a row during the period between Q4 2016 and Q2 2018.
The decrease in the pace was mainly driven by an improvement in the contribution of the non-oil trade balance deficit, the oil trade balance surplus, and the remittances of workers abroad. This was partly limited by the decrease in the contribution of both the net investment income deficit, while the contribution of the net services surplus stabilised.