The Middle East’s Munificent Modernization Script

Middle East markets continued to power ahead despite ratcheted up geopolitical clashes after double-digit first quarter gains on the MSCI Index, as foreign investors bet on economic policy changes amid relative leadership continuity to again justify regional exposure. Egypt perked up after a flat quarter as President Sisi’s unopposed re-reelection coincided with a positive IMF review of the 3-year $12 billion program, which has replenished reserves as inflation finally comes down from 15% on a possible path to the single-digit target. GDP growth was upgraded to 5.5% this fiscal year, but the budget hole will remain steep at 8% despite automatic fuel price indexation, while the timetable for electricity subsidy elimination will extend another five years. Capital inflows support the pound after the Fund-ordered float, and disinflation may spur central bank rate cuts to trigger an equity rally matching frontier counterparts. Next-door Israel in contrast has near-zero inflation with rates on hold, as the shekel has strengthened in similar fashion, without eroding high-tech exports helping to sustain near 3.5% growth. Private consumption is also solid as Prime Minister Netanyahu tries to deflect corruption charges against his family with a campaign to lower living costs, especially housing. Political observers believe the controversial effort to evict African immigrants may have derived in part from the urgency to find affordable space in Tel Aviv and other major cities. The plan, with paid relocation to Rwanda and other countries, met with widespread human rights group condemnation at home and abroad and was quickly dropped.

Lebanon was up 5% on the MSCI frontier index ahead of May parliamentary elections, which will experiment with proportional representation rather than mandatory sectarian allotment. Growth continues at a meager 2% clip with tourism improving, as construction will be boosted by billions of dollars in medium-term infrastructure projects pledged at a Paris donor conference. The budget deficit is almost 10% of GDP, and public debt is over 150% with no end to Syria civil war ripples as the central bank opts for bond swaps with the Finance Ministry. The pound peg to the dollar remains sacrosanct, with enough reserves to meet one year’s imports. Saudi Arabia rose over 10% in Q1 and its currency regime likewise is stable with oil prices nearing $70 dollars/barrel. Foreign investor inflows hit a record on an expected Financial Times index upgrade and further Aramco IPO promotion following a royal family global tour. King Salman and his entourage crisscrossed the US and touted deficit halving to 4% of GDP, although VAT introduction will hike inflation to the same level. Investors are positioning for potential partial stock exchange privatizations which could add free float to nominal $500 billion capitalization and release large blocks to compete with consecutive $15 billion external bond taps. Tiny Tunisia jumped 30% over the period with an FDI and tourism spike despite slow progress on state bank bad loan workout intended to recover $2 billion under the IMF accord. During the spring meetings officials pitched businesses on new public-private partnerships to be showcased at an upcoming conference, and fund managers took note of Fidelity’s increased back-office hub in the country as a rare transition trophy.