Arab markets unlikely to feel flight of foreign capital

Friday 09/10/2015
A Saudi investor monitors the stock exchange at the Saudi Stock Exchange, or Tadawul, in the capital Riyadh.

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.”