Back to the complete issue
Tuesday, 31 March 2020

Are emerging markets about to impose capital controls?

Are emerging markets about the slap on capital controls? Emerging market economies are witnessing a collapse in external financing, with indications that outflows from EM bond and equity funds of the last three weeks exceeded 4% of net asset value. Normal protocol would see EM policymakers respond by selling reserves and allowing their currencies to devalue, but with the spread of covid-19 putting us all in uncharted territory, policymakers are reticent about selling USD. The answer could well be capital controls, writes David Lubin, Citi’s head of emerging markets economics, in the Financial Times.

Risk is going up, but certain risk premium measures are going down: Public debt burdens in EMs are increasing, either because of automatic fiscal stabilizers or because of measures taken to protect citizens from the economic fallout of covid-19, says Lubin. But at the same time, some aspects of the risk premium are going down along with monetary policy easing by central banks. So while a given country’s domestic economy might benefit from lower rates, preventing large capital outflows may require higher interest rates — especially with rising debt burdens.

Some EM may decide it’s best to just close up shop for the duration: This could see countries defaulting on debt or imposing restrictions on domestic banks’ ability to sell USD through taxes, differential exchange rates or even bans. These measures are all the more likely thanks to the IMF’s increased flexibility on the subject of capital movement restrictions and the probability that the Trump administration would not support measures to boost international liquidity, such as new Special Drawing Rights for member countries, Lubin says.

Egypt has managed to avoid the worst of this, so far: We’ve already seen analysts predict that the central bank’s emergency 300 bps rate cut two weeks ago is likely to accelerate outflows of foreign debt securities, but for the moment EGP debt still remains “relatively attractive.” But as we remain in a covid-19 lockdown, which Renaissance Capital predicts we may struggle to finance, the question of how long we can sustain these heavy outflows remains answered.

Enterprise is a daily publication of Enterprise Ventures LLC, an Egyptian limited liability company (commercial register 83594), and a subsidiary of Inktank Communications. Summaries are intended for guidance only and are provided on an as-is basis; kindly refer to the source article in its original language prior to undertaking any action. Neither Enterprise Ventures nor its staff assume any responsibility or liability for the accuracy of the information contained in this publication, whether in the form of summaries or analysis. © 2022 Enterprise Ventures LLC.

Enterprise is available without charge thanks to the generous support of HSBC Egypt (tax ID: 204-901-715), the leading corporate and retail lender in Egypt; EFG Hermes (tax ID: 200-178-385), the leading financial services corporation in frontier emerging markets; SODIC (tax ID: 212-168-002), a leading Egyptian real estate developer; SomaBay (tax ID: 204-903-300), our Red Sea holiday partner; Infinity (tax ID: 474-939-359), the ultimate way to power cities, industries, and homes directly from nature right here in Egypt; CIRA (tax ID: 200-069-608), the leading providers of K-12 and higher level education in Egypt; Orascom Construction (tax ID: 229-988-806), the leading construction and engineering company building infrastructure in Egypt and abroad; Moharram & Partners (tax ID: 616-112-459), the leading public policy and government affairs partner; Palm Hills Developments (tax ID: 432-737-014), a leading developer of commercial and residential properties; Etisalat Misr (tax ID: 235-071-579), the leading telecoms provider in Egypt; and Industrial Development Group (IDG) (tax ID:266-965-253), the leading builder of industrial parks in Egypt.