Qatar- Capital flows to Mena bounce back: IIF

DOHA: Non-resident capital inflows to Mena is expected to rise to $224bn this year, equivalent to about 8 percent of the region's GDP, and twice the ratio for Emerging Markets (EMs). The main source of inflows in 2018 will continue to be sovereign bond issuance, according to Institute of International Finance (IIF).

IIF also sees significant increase in corporate issuance due mainly to the large refinancing need of loans and bonds that mature this year. Foreign direct investment (FDI) flows are likely to remain subdued in the near term due to political uncertainty in some countries and lack of progress in improving the business environment.

The GCC covered about one-third of its large fiscal financing needs through sovereign bond issuances taking advantage of the low global interest rate environment and seeking to ease liquidity conditions in local banks.

The region's oil importers have also registered large nonresident flows, led by Egypt, and supported by the IMF's three-year Extended Fund Facility (EFF). Capital flows to Mena rose rapidly during 2003-2007, a period of high growth, rising oil prices and large current account and fiscal surpluses. Most of the inflows were accounted by the GCC and were mainly from foreign banks to finance local banks and corporations. In contrast, capital flows to oil importers were mainly in the form of FDI. Inflows fell sharply with the global financial-crisis in 2009 and in 2011. As foreign investors reduced their positions, BIS reporting banks' claims on Mena declined from 18 percent of GDP in 2008 to 12 percent in 2013.
According to IIF, a key question facing Mena for this year is the impact of the US Federal Reserve's monetary policy normalisation process on capital flows to the Mena region. In general, short-term US and GCC interest rates move together as the region's currencies are pegged to the dollar. IIF expects a significant pick-up in economic activity this year, supported by the partial recovery in oil prices and fiscal consolidation easing. As a result, credit to the private sector is likely to grow by about 4 percent in 2018 and 7 percent in 2019. Having said that, further narrowing of the spreads is unlikely.
'We see four rate hikes by the Fed in 2018, totaling 100 bps. A faster-than-expected pace of rate rises would trigger heightened risk aversion and raise external borrowing costs. While several emerging economies could experience outflows, some Mena countries, including Qatar, Kuwait, Saudi Arabia and the UAE, will be less affected. The GCC countries' 'pull factors are stronger than the global 'push factors. Moreover, we see a sharp increase in corporate (banks and nonbanks) issuance in 2018 H1 due to a large refinancing need of loans and bonds that are expected to mature in 2018,IIF analysts said.
Governments and corporates in the region could seek to lock in the relatively low levels of interest rates that are still available in the global market before local rate rise significantly as the Fed raises interest rates gradually.