The Middle East’s Suspended Syria Senses
Regional capital markets tentatively retraced as a US-threatened military operation against selected Syrian targets was put on hold pending a proposed agreement with ally Russia to relinquish chemical weapons to international control, as political and geo-political tensions continued to simmer. Egyptian stocks trimmed their year to date loss to 15 percent as the army roundup of Muslim Brotherhood leaders intensified following President Morsi’s ouster and the next transition phase considers an outright ban on the group more severe than during the Mubarak era. The constitutional committee will resume work with participation from the Salafi party whose Islamic credo is stricter, and the specific timetable for upcoming elections has yet to be determined with the general in charge of the interim government touted as a potential candidate. Foreign exchange reserves have stabilized at around $18 billion, and the pound at 7 to the dollar, on $12 billion in combined loans, grants and oil shipments from Kuwait, the UAE and Saudi Arabia, where shares are solidly positive paced by the Emirates’ 50 percent gain. However the infusion may be diluted by the potential withdrawal of $5 billion in aid from the EU and $1.5 billion from the US in response to the violent takeover and opposition crackdown, which also resulted in the resignation of initially-designated prime minister El-Bareidi. Fiscal consolidation slipped from the agenda with the Gulf inflows despite the near 15 percent of GDP deficit the past year as a stimulus package was announced following a July interest rate reduction. Domestic debt/GDP stands at 80 percent and long-term bond yields still approach 15 percent with further bank absorption capacity limited under capital and earnings squeezes. The other MSCI core member Morocco was off by similar magnitude as a centrist party prepared to join the ruling coalition after Islamist exit in protest of lower fuel subsidies under the precautionary $6 billion IMF program. Modest progress was cited in the latest Fund review on curtailing the budget and current account gaps as debt servicing costs rose 10 percent annually. A sovereign Eurobond was issued in late 2012, and Jordan and Tunisia will mobilize bilateral and multilateral guarantees to tap the external market should the global window soon reopen.
Lebanese shares have only shed 10 percent through September despite their front-line Syrian civil war entanglement underscored by a recent GCC-circulated travel warning. Kidnappings and sectarian incidents have jumped as negotiations over new cabinet formation are stalled and complicated by the EU’s branding of Hezbollah, which sides with the Assad regime, as a terrorist movement. Both GDP growth and inflation should end 2013 at 2 percent as tourism and food prices recede. Israeli equity results were better on quarterly output expansion at double that clip as offshore natural gas production began. Consumption is expected to flag into year-end on a higher VAT, as the shekel continues to hold up despite postponement of central bank head succession after several aborted searches.
