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 Non-resident 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 state-owned 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.