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The Middle East’s Integrated Introspection

2019 March 10 by

Unlike most other emerging stock markets enjoying a bounce this year, as reflected in Bank of America’s latest asset allocation survey where they were a record overweight, Middle East components Jordan, Lebanon, Morocco and Tunisia have limped through February under international development agency criticism and investor ambivalence. An International Monetary Fund report underscored the lack of trade and financial integration among Maghreb countries Algeria, Libya and Mauritania alongside Morocco-Tunisia despite union proclamation three decades ago. Only the last two are not exclusively focused on commodity exports and are out of conflict and in democratic transition, with group average gross domestic product growth only 2.5% on 25% youth unemployment.

 A separate World Bank analysis examines the economic and social dynamics of possible Syrian refugee return from Jordan, Lebanon and Turkey, which together host the greatest population of the 5.5 million registered outside the country. It dissects the so-called “mobility calculus’ to weigh factors beyond hostility end, such as job, land, and infrastructure access in deciding on repatriation. The study finds these considerations remain overwhelming deterrents along with basic security, and explain why only 100,000 have gone back from neighbors. Damascus’ $400 billion reconstruction price tag, with scant expected Western donor support, is another argument for extended displacement both externally and internally, with equal numbers at large.

In 1989 the five Maghreb members established a free trade area again agreed by representatives in 2010, but it was never ratified.  In contrast Morocco and Tunisia inked pacts with Europe, Turkey and the US and they also joined the World Trade Organization and China’s Belt and Road Initiative. Over one-tenth of imports were Chinese in 2016, although trade openness declined overall with limited progress on product quality and export diversification. Intra-Maghreb commerce is less than 5% of the total, and mostly gas and oil, iron and steel, and clothing. Bilateral direct investment statistics are sparse but flows are “insignificant,” the IMF comments. The main example is Moroccan banks’ cross-border expansion, in the North as well as Sub-Saharan Africa. Number one Attijariiwafa Bank is in Tunisia and Mauritania and a dozen other countries, as the region continues to struggle with weak state-owned lenders. Financial technology has spread, with digital and mobile money regulations now in place. A new Maghreb Bank for Investment and Foreign Trade was created in 2017 with $500 million in capital to promote institutional and payments network integration, but the founders warned the process will be slow amid a spike in global financial volatility.

Tariff, non-tariff and geopolitical barriers persist, with the average 15% duty a departure from the 5% -10% in advanced and developing economies. Cross-border trading rankings in the World Bank’s Doing Business publication are low, reflecting poor logistics performance. Capital movements are typically restricted, with only Morocco’s account relatively liberal, although it still controls currency conversion for profit repatriation. Its more flexible pegged regime against a dollar-euro basket is far from a competitive float, a goal envisioned over a 15-year time horizon. Further Maghreb steps to closer ties as originally promised could forge a single block of 100 million consumers with combined $350 billion GDP, and facilitate global value chain inclusion through positioning as a hub between Europe and Sub-Sahara Africa, the Fund suggests. Trade is complementary and capital markets would benefit from internal reforms and cross-listing arrangements with existing regional zones in West Africa and elsewhere. Morocco embarked on this path with an application to join the English-speaking ECOWAS, and invited banks and brokers to locate in the nascent Casablanca Financial Center for broad geographic reach.

In the eighth year of the Syrian refugee crisis Jordan remains under intense fiscal and social pressure, as the latest IMF program and the World Bank’s mobility reviews point out. Growth was just 2% last year on 4% inflation, as the budget deficit again exceeded the target ahead of the London donor conference at end-February. Tax evasion and state enterprise losses remain widespread, as subsidies stay intact to mitigate the pain of near 20% unemployment. At international community urging, the government issued more work permits to Syrians to allow them formal jobs. However extreme poverty still affects half that population there, the identical rate as at home with reduction urgent in both places, the World Bank concludes.

Iran’s Premium Pressure Valve Valuation

2018 December 10 by

The Tehran stock exchange was up 40% in local currency terms in September, although its annual decline was the same magnitude in dollar terms with the rial’s 75% depreciation, as investors rushed into commodity-linked companies able to raise prices ahead of the US’ final round of resumed energy and banking sanctions. The State and Treasury Departments vowed “maximum pressure” to curb Iranian Revolutionary Guard regional adventurism, and trigger negotiations on a new anti-nuclear and terrorism pact to replace the unilaterally shelved 2015 JCPOA joint agreement. They allowed European and Asian signatories still honoring it to provisionally continue oil imports, with the eventual goal of full cutoff. In a “single biggest action” 50 Iranian financial institutions and their domestic and foreign subsidiaries were designated off-limits, including the central bank and well-known state-controlled commercial lenders Melli, Sepah, Saderat and Tejarat.

 The Brussels-based SWIFT cross-border payments network in turn disconnected the group without naming the specific list, as European backers of a “special purpose vehicle” led by France and Germany scramble to finalize a euro-denominated channel to maintain credit and trade links from the original deal. President Hassan Rouhani hailed this potential opening and continued oil shipments at least in the 1 million barrels/day range, as his government with a new technocrat Economy Minister reportedly organized a dedicated sanctions-busting unit. Rial devaluation leveled off before President Trump’s November order, and stock exchange price earnings ratios hit double digits as retail investors tried to preserve savings and access hefty dividend yields. Outside the blacklisted firms across an industry swathe including construction, insurance, mining and shipping they may still find decent prospects, as the country again girds for self-defined external economic onslaught as a regular Islamic Revolution feature.

This fiscal year first quarter from March to June registered over 1.5% gross domestic product growth, according to official statistics, but the International Monetary Fund now predicts contraction at the same level and an even greater 4% drop next year. Inflation is back in double digits with the rial crash and agriculture bad weather, and is projected to leap from 15% currently to 30% in the IMF’s view, with benchmark Islamic Treasury bill yields already near 20%. The government has set aside $4 billion from the sovereign wealth fund and granted foreign exchange preferences to pay for basic food and medicine, which the US pledges also to exempt from trade prohibition on humanitarian grounds. Reprising a program from previous sanctions and war episodes, citizens will receive baskets of staples that could help tip the budget into serious deficit.  Public debt will reach 40% of GDP, as the current account surplus shrinks with slashed oil exports. The President and his team claim ample international reserves to withstand the crisis, estimated at around $100 billion, and previously shifted to euro holdings, but the exact figure is unknown and access and liquidity could be constrained under the repeated US clampdown.

The bilateral confrontation may further delay compliance with the multilateral Financial Action Task Force’s anti-money laundering and terror funding standards, a gap which keeps big Asian and European banks away regardless of sanctions status. Iran has been on the Paris-based body’s “grey list” pending passage of enabling laws, and the deadline was recently extended again to February 2019. In October, lawmakers over hardliner objections approved drafts by a slight margin, which the clerical Guardian Council headed by Supreme Leader Ayatollah Khamenei then rejected as a Western-imposed regulatory and foreign policy threat. Rumors abounded that agreement could compromise incipient crypto-currency arrangements with Russian and Turkish counterparts to circumvent all forms of monitoring, as private foreign exchange traders facing arrest also dabble in that alternative.  However the odds are brighter for other bank reforms, such as a corporate governance bill to boost supervisory disclosure and reporting. After appointing Economy Minister Farhad Dejpasand when his predecessor lost parliamentary confidence, President Rouhani reiterated that financial sector modernization, including deep and diverse capital markets, was a priority. The stock exchange has an over-the-counter market to aid small and midsize companies which will suffer badly in recession, and he pressed also for more large state enterprise divestitures already at $150 million this fiscal year.  These moves may be incremental, but can serve as a partial sanctions antidote while shifting the domestic narrative to overdue structural fixes that seal investor interest.