MENA’s Capricious Capital Flow Flare
The IMF’s Middle East and Central Asia October economic snapshot highlighted changing capital flow patterns from direct to portfolio inflows in recent years, with pronounced global financial market sensitivity regardless of oil prices. Five countries—Lebanon, Morocco, Pakistan, Qatar and Saudi Arabia—took two thirds of cross-border securities allocation and bank lending, and one-third went for sovereign borrowing mainly to close fiscal deficits. From 2016-18 the broad region accounted for 20% of the emerging market total, quadrupling its share over a decade. Oil exporters have dominated Eurobond issuance with $75 billion from last year through the first half of 2019, while bank flows are above other geography averages despite severed correspondent relationships in Iran and Yemen. For oil importers, current account gap financing is a major driver, despite outstanding foreign investor access and ownership limits as competitive disadvantages. Inflexible exchange rates can also heighten volatility, and the lack of local institutional bases for liquidity and size, and weak corporate and government transparency, can spur large crisis outflows according to a Fund “push-pull” model. Its research also found relative “decoupling” from geopolitical tension despite a spike in a “social unrest index” of protest and strike media coverage.
OPEC has been unable to control this year per barrel oil value fluctuations between $55-75, as hydrocarbon exporter growth is forecast at 1.5%, although the pace should double in 2020. Reduced productivity and FDI dampen output and the Gulf will expand less than 1%, with Kuwait, the UAE, and Qatar looking to sporting and tourism events for boosts. Iran is in “steep recession” and will contract almost 10% under pervasive US sanctions. Algeria, Iraq and Libya are in conflict, and regional non-oil growth is lackluster with narrow private sectors. Commercial banks are adjusting to real estate declines, as state-owned system restructuring is long overdue. Bahrain and Oman have thin fiscal cushions and may need neighbor support, while civil servant wage bills and subsidies are too generous everywhere. Consumption and value-added taxes should be introduced, and procurement processes overhauled. Structural reforms and securities market modernization in particular, could lift GDP half a point annually, with partial sale of designated “strategic” enterprises an untapped revenue and efficiency source. A headline transaction is the 5% IPO of Saudi Aramco listed on the local stock exchange as a 600-page prospectus attempts to lure foreign investors with flush dividend and earnings projections.
Oil importers can expect “tepid” recovery with 3.5% average real growth, on inflation “at bay” outside Egypt, Pakistan, Sudan and Tunisia. Despite solid inward remittances, current account deficits and external debt will together be $250 billion, or 150% of reserves. Lebanon is currently in political and financial crisis against this backdrop, as the pegged exchange rate and bank rollover of state debt through complex “engineering” may be exhausted. Primary fiscal balances are negative across the board, and off-balance sheet liabilities are often untracked. Jordan and Tunisia have large refugee populations with international aid only partially offsetting budget costs. Like Egypt they are under traditional IMF programs to stabilize fundamentals and foster “inclusive” economies with a mixed track record. Egypt’s reserves were replenished and the fiscal deficit cut from double digits, but the 700,000 annual job creation goal remains elusive as a successor arrangement is also pending.
