What we’re tracking on 16 August 2018
We’re practicing economics without a license, but what the hell — it’s not a bad note on which to start a nearly weeklong vacation:
It’s interest rate day and the consensus among 12 analysts polled by Reuters is that the central bank’s Monetary Policy Committee will leave interest rates on hold. Yes, inflation cooled, but the CBE will want to see it continue to ease before looking at a rate cut. More importantly, the global macro backdrop essentially demands the central bank not cut rates today.
We had been cheerleading a rate cut, arguing that lower borrowing rates are needed to kickstart borrowing by domestic businesses. But keeping overnight lending and deposit rates stable (for now) at 16.75% and 17.75%, respectively, could prove a key weapon in the battle to isolate Egypt from contagion threatened by a wider EM crisis sparked by Turkey.
That’s because emerging market equities are now in bear territory (shocker, we know) and Egypt is your best option in a slump, at least if you’re a debt investor. Let’s start with the good news, shall we? Traders looking for refuge from volatility will find it in Egypt, Netty Idayu Ismail and Ahmed Feteha write for Bloomberg. While Egypt is “a little bit over-crowded,” one asset manager says, “the relatively high yield and relatively stable currency … [will see it] remain an interesting investment [option] for emerging-market investors.” You can thank “tough measures to stabilize the economy,” which are paying off as “strong growth in inflows from tourism and remittances have … helped offset fund outflows in recent months.” Foreign investors pared their holdings of Egyptian treasuries to USD 17.5 bn in July from USD 21.6 bn in March.
Why do investors love Egyptian debt? Stability, to be sure: The EGP’s 30-day historical volatility has eased to below 2% while the comparable indicator for Argentina is at near 20% and for Turkey at more than 70%. But really, it’s a yield play: “Egyptian treasury bills offer an average yield of almost 19%, pretax, compared with about 5 percent for local-currency emerging-market debt,” Bloomberg says. Argentina and the nutter running Ankara offer higher yields — and much higher volatility.
Oh, and you can also thank both a smooth-running interbank FX market and the CBE’s repatriation mechanism for the stability.
What, me worry? Egypt may look good right now, but the chief economist of the Institute of International Finance tells Reuters you’ll want to keep an eye on those fund flows. There is “potential for contagion in the form of capital outflows from some other major emerging markets, including Argentina, South Africa, Indonesia, Egypt and Lebanon,” the newswire quotes the IIF’s Robin Brooks as saying.
So, what’s this about a bear market for EM? Emerging market equities have “slumped into a bear market” again, falling to a six-month low on the back of weak Chinese economic data and EM currencies taking a hit, according to the Financial Times. A market enters bear territory when prices are down 20% or more from their 52-week high.
What’s going on? “Emerging markets have faced mounting pressure over the past few months. Concerns over trade wars have weighed heavily, while rising US interest rates and the [USD’s] renaissance have dented the lustre of emerging markets, and contributed to crises in more vulnerable countries which are dependent on capital inflows, such as Argentina and Turkey,” the FT writes. Also a factor: That nasty slowdown in EM export growth.
Not everyone sees Turkey threatening a wider EM contagion, the Wall Street Journal’s Josh Zumbrun writes, suggesting that Ankara’s issues are unique. Other emerging markets (including Egypt) suffer from one or more economic challenges, but Turkey’s “economic woes include one of the largest trade deficits of any emerging-market country, unmatched external debts, a currency vulnerable to decline, exceptionally high inflation, unorthodox monetary policy and very little international goodwill,” which Zumbrun notes makes it unlikely the IMF will be keen on offering Ankara a bailout.
The strength of the USD could remain a challenge for the foreseeable future — and Turkey could make it worse if it were to introduce capital controls and repudiate some of its foreign debt, helping drive the global appreciation of the greenback, strategists at Macquarie write, according to Business insider. Don’t expect the pressure to ease up soon, Wolf Richter adds: EM governments and companies face USD 2.7 tn in USD-denominated bond and loan obligations through 2025.
But who needs the IMF when you have pals? Doha reportedly pledged yesterday to funnel USD 15 bn in direct investment in Turkey to help rescue the country from impending financial doom, Bloomberg reports. Qatar’s pledge — which analysts say is the fruit borne from Turkey standing by Qatar in its stand-off with the Arab Quartet — and Ankara’s clampdown on short-sellers of TRY helped drive the lira’s 6% rise yesterday. Bahrain is also getting a lifeline of sorts as the foreign ministers of the UAE, Saudi and Kuwait met in Manama yesterday to review an aid program to “help the country repair its finances and stave off a possible currency devaluation that could roil regional markets.”
Okay, so that’s the end of my worry list, right? Not quite, the New York Times suggests in an opinion piece by Ruchir Sharma, who argues that “the fate of the world economy depends on how China negotiates a weakening currency and capital flights.” Read: Worried About Turkey’s Economic Problems? China’s Could Be Worse.
Oh, and the guy who called the Turkey implosion? He sees a general financial market crisis around the corner. His timing was off, but Tim Lee predicted what’s happening in Turkey and he sees a future in which “the river of global cash will dry up, the USD will spike and there will be a series of financial seizures. Investors, he thinks, will flee developing economies, then Europe and eventually the American stock and bond markets.”
Okay, that’s it — I can stop worrying? Only if you’re not a banker. If you run a financial institution, you want to call in your CTO, your compliance guys and whoever else cares about cybersecurity, because the world’s most powerful botnet has turned its attention to hacking the global banking system. The Necurs botnet, a network of mns of compromised computers that do the bidding of criminals, has pivoted its business model: It’s targeting the employees of some 2,700 banks (and counting) with phishing messages, Axios reports. It would be a good day to remind your staff what, exactly, a suspicious email message looks like. And remember: this comes just days after the FBI warned banks that a criminal group is planning to commit ATM fraud on a global scale this week.
** Now, in good news: It’s holiday time, ladies and gentlemen. The CBE and the Cabinet have declared Monday 20 August-Thursday 23 August off for Eid Al Adha. We’ll be bridging this holiday and taking the week off for some much needed R&R. We are not publishing this coming Sunday, so you can expect to see us back in your inboxes at the usual time on Sunday 26 August.