Arab markets unlikely to feel flight of foreign capital
Beirut - Global investors pulled an estimated $40 billion from emerging market assets in the third quarter, seeking better returns in the United States where interest rates are expected to rise soon, but Arab markets, also classified as emerging, seem to have eschewed the losses and are likely to attract more foreign funds in the fourth quarter.
Gulf markets seem the least worried in the region since most of their national currencies are pegged directly or indirectly to the US dollar. “In Gulf markets in general, especially in the UAE, where foreign investment is encouraged, usually foreign investments come and go for reasons other than dollar interest rates,” said Ziad Dabbas, an Abu Dhabi-based financial analyst and consultant.
“In any event, the prospective rise in US interest rates isn’t expected to exceed 0.25%, and since Gulf currencies are pegged to the dollar, the rise isn’t supposed to have a major effect on foreign investment,” Dabbas said. “Gulf markets allowing foreign investment offer 4.5-5% returns, which is high in international standards. Thus, our markets are poised to attract more, not less investments.”
According to data from the Institute of International Finance (IIF), the third quarter was the worst since the end of 2008 in terms of fleeing foreign investments. An estimated $19 billion was pulled out of equities and $21 billion out of debt, the Washington-based finance industry body said in a report September 29th.
Dovish signals from the US Federal Reserve’s September policy meeting provided a short-lived boost to emerging market flows. The Fed held off raising interest rates, which haven’t gone up since 2006, citing concerns about slower global growth, China and market turbulence.
The decision generated a small relief rally in emerging markets but this soon reversed and the main equity benchmark ended the quarter down almost 19%.
“Concerns about Fed lift off are… likely to have added to recent market volatility, which seems to have weighed on emerging market portfolio flows,” the IIF said. With a weak report on the US labour market, released October 2nd, the Fed is widely seen as putting on hold its interest rate hike.
“Many observers believe that UAE and Saudi markets will attract more foreign investments in the fourth quarter because stocks are highly yet justly priced,” Dabbas said. “The UAE markets, that is Abu Dhabi and Dubai, seem the first option in the Gulf, followed by the Saudi market”, which allowed for foreign investments as of June.
The investor sell-off represents the largest reversal since the fourth quarter of 2008, the height of the financial crisis, when emerging markets saw $105 billion in outflows, the IIF said.
The quarterly figures include an unusually large revision to the IIF’s July debt flow estimate, from inflows of $6 billion to outflows of $12 billion.
Oil exporters, including Saudi Arabia and the UAE, have shackled their currencies to the dollar in longstanding arrangements that made sense when commodity prices were high and the dollar was weak. However, Gulf countries’ currency pegs to the dollar are under pressure from low oil prices and a stronger dollar but there is no chance of them being abolished, ratings agency Fitch said September 22nd.
“There is some pressure on exchange rate pegs in the region… (however,) it’s not going to happen.
I really don’t see any change for these exchange rate pegs,” said Paul Gamble, senior director at Fitch Ratings, adding that abolishing the pegs would be a political rather than an economic decision. “The pegs are the key and really the only nominal anchor in these economies and the pegs are backed by huge reserves,” Gamble said at a briefing.
As long as oil pricing is done with the US dollar, Gulf states will continue to peg their currencies to it, a Gulf state official told The Arab Weekly. The currencies of Saudi Arabia, the UAE, Qatar, Oman, and Bahrain are directly pegged to the US dollar. Kuwait’s dinar is pegged to a basket of currencies that includes the dollar and the euro, he explained.
The fact that the rapid growth enjoyed by emerging markets over the past two decades could be in jeopardy as the world adjusts to China’s slowdown and a “prolonged period of low commodity prices” also worried Christine Lagarde, managing director of the International Monetary Fund (IMF).
Speaking September 30th in Washington ahead of the IMF’s annual meeting, Lagarde warned that global growth was likely to be weaker in 2015 compared with 2014 as emerging economies face a fifth consecutive year of declining growth.
“Gulf states have huge cash reserves from recent years when oil prices were high,” the Gulf state official said. “They can continue to spend on their huge projects and, if they needed cash, they can borrow from local banks. No problem. And as they sustain their growth, their financial markets will continue to attract foreign investment.”