Non-res­i­dent cap­i­tal in­flows to MENA to peak at USD 62 bil­lion in 2017 backed by Egypt-re­port

GOV­ERN­MENT RE­FORM PLANS RE­STORED IN­VESTORS CON­FI­DENCE, SAYS IIF

The Daily News Egypt - - Business - By El­sayed Soly­man

Non-res­i­dent cap­i­tal in­flows to MENA oil im­porters are ex­pected to peak at $62 bil­lion in 2017, on the back of the sharp in­crease in in­flows to Egypt, a re­cent re­port by the In­sti­tute of In­ter­na­tional Fi­nance con­cluded.

“While the marked de­pre­ci­a­tion of the Egyp­tian pound and the tight mon­e­tary (in­clud­ing rais­ing the key pol­icy rates by 500 bps in the past eight months) and fis­cal poli­cies have been painful, they were crit­i­cal steps to re­store com­pet­i­tive­ness and macroe­co­nomic sta­bil­ity and to al­le­vi­ate in­vestor un­cer­tainty over what their pound will be worth,” the re­port added

Con­se­quently, non-res­i­dent cap­i­tal in­flows to Egypt al­most dou­bled to $41 bil­lion in FY 2016/17 on

the back of a sub­stan­tial in­crease in port­fo­lio flows, the dis­burse­ment of loans from mul­ti­lat­eral or­ga­ni­za­tions, and the is­suance of Eurobonds.

For­eign in­vestors held the equiv­a­lent of $10 bil­lion in gov­ern­ment se­cu­ri­ties as of June 2017.

The re­port also noted that Non­res­i­dent cap­i­tal flows to emerg­ing mar­kets should rise to $1.1 tril­lion this year, up from $763 bil­lion 2015.

This amounts to about 4% of EM GDP—a good re­cov­ery from 1.5% of GDP in 2015, but

still well be­low the pre-cri­sis peak of over 9% in 2007.

Al­most all com­po­nents have risen, led by the dou­bling of port­fo­lio debt in­flows to $242 bil­lion and “other in­vest­ment” in­flows (largely bank­ing-re­lated) to $293 bil­lion—re­flect­ing the search for yield.

The ex­cep­tion was a fourth yearly de­cline in FDI flows, to $467 bil­lion, prob­a­bly due to the lagged im­pact of fall­ing com­mod­ity prices, pro­tec­tion­ism, and on-shoring—a con­cern as FDI had been a very sta­ble com­po­nent of oth­er­wise volatile cap­i­tal flows to Ems.

By con­trast, EM res­i­dent cap­i­tal out­flows have fallen sub­stan­tially, to $770 bil­lion from more than $1 tril­lion last year, driven by the large fall in cap­i­tal out­flows from China (by more than half, to $259 bil­lion).

As a re­sult, net cap­i­tal flows to EMs have turned from large net out­flows in re­cent years to a small net in­flow.

EM cen­tral banks have thus started to ac­cu­mu­late re­serves again to the tune of $221 bil­lion— af­ter two years of re­duc­tion.

Mean­while, Non-res­i­dent cap­i­tal flows to the GCC coun­tries are ex­pected to de­cline to $79 bil­lion in 2017, from $112 bil­lion in 2016.

The sharp de­cline in flows can be ex­plained by two fac­tors ac­cord­ing to the re­port: a sharp de­cline in port­fo­lio flows to Qatar due to

the im­pact of the cut in diplo­matic and trans­port links by sev­eral Arab coun­tries and the nar­row­ing of the fis­cal deficits in GCC coun­tries, which led to less ex­ter­nal fi­nanc­ing need.

“How­ever, we ex­pect a re­bound in cap­i­tal in­flows in 2018 due to pro­jected pro­ceeds of $50 bil­lion from the sale of 5% of the sta­te­owned oil gi­ant Aramco, which is worth be­tween $1 and 2 tril­lion,” the re­port noted.

Res­i­dent cap­i­tal out­flows in the GCC re­main sig­nif­i­cant de­spite the shift in the cur­rent ac­count bal­ance from a sur­plus of $237 bil­lion in 2014 to deficits of around $40 bil­lion in 2015-2016 and pro­jected small sur­pluses in 2017 and 2018.

While of­fi­cial re­serves fell sub­stan­tially, mainly in Saudi Ara­bia, the res­i­dent non-gov­ern­ment sec­tor con­tin­ued to ac­cu­mu­late as­sets abroad.

Both port­fo­lio and other in­vest­ment out­flows con­tin­ued to rise, mainly driven by the SWFs of the UAE, Qatar, and Kuwait. Th­ese three coun­tries pre­ferred not to tap their large SWFs to fi­nance the deficits given the low

cost of bor­row­ing in the in­ter­na­tional mar­kets.

Gross pub­lic for­eign as­sets (in­clud­ing of­fi­cial re­serves and SWFs) of the GCC, which peaked at $2.7 tril­lion in 2014, have de­clined to $2.4 bil­lion in June 2017 (165% of GDP), due mainly to the fall in of­fi­cial re­serves of Saudi Ara­bia.

The re­port also noted that Non-res­i­dent cap­i­tal flows to emerg­ing mar­kets should rise to $1.1 tril­lion this year

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