As Turkey’s growing economic crisis shook investor confidence in lenders exposed to the country, foreign investments in Egyptian government securities on the other side are booming.
Egypt’s government is taking a very positive outlook on the Turkish economic fiasco which is currently wreaking havoc on emerging markets, minister of finance Mohamed Maait told Enterprise on Monday.
Foreign investments in Egyptian government securities rose last week largely spurred by the Turkish crisis, Maait said.
This comes after foreign holdings in Egypt’s debt dropped by around $3 billion and $4 billion during the emerging markets sell-off, and yields at government bond sales rose to new highs to lure investors in.
Maait did not specify the amount of growth in portfolio investments, but said that the turbulence in Turkey has driven these investors to the North African country.
“They were lured by our high yields,” said Maait, who added that these remained attractive despite Argentinian bond yields rising significantly.
“This line of thinking will undoubtedly play into the Central Bank of Egypt’s Monetary Policy Committee meeting this month, especially as the Finance Ministry increases its coordination with the central bank.”
From foreign trade perspective, Egyptian government is looking to capitalise on the Turkey mess, according to statements by Trade and Industry Minister Amr Nassar. The government is currently looking at maximising exports to Turkey, which is going through a liquidity crisis, Nassar told Amwal Al Ghad on Sunday without elaborating on any specific policy.
Crisis impact on Emerging Markets
So far the most visible collateral damage from the Turkish crisis has been other Emerging Markets currencies, with the TRY dragging the ruble, the Argentine peso, and the South African rand. Egypt and GCC stocks fell across the board again on Sunday.
“MENA (Middle East and North Africa) equities remain under-represented in global portfolios (and are thus less exposed to global EM (emerging market) outflows),” Sanat Sachar, equity research analyst at Al Mal Capital, told Reuters.
Analysts opinions on the extent of emerging contagion from the crisis differs widely. “We are going to see earnings drop in the back of this for those banks that are exposed to the Turkish story and we are also seeing the contagion and spillover effects of these huge moves in Turkey which are getting worse,” according to Jordan Rochester, a currency strategist at Nomura International.
Paul McNamara, a London-based money manager at GAM UK, disagrees, told Bloomberg that “this can be contained to just Turkey because there aren’t really any other emerging markets which have the exact toxic blend that Turkey has.”
Capital Economics’ report
A recent report issued by Capital Economics said the direct risk of contagion from Turkey’s crisis to other emerging markets is fairly low. However, the report noted that Turkey’s problems may add to the accumulating negative sentiment towards EMs in general, and this in turn could make financial conditions more difficult for emerging economies in the coming months.
The fall in the lira appears to have caused sentiment towards EMs more generally to deteriorate, Capital Economics’ report added. Most EMs currencies are down by 0.5-1.5 percent against the dollar and central banks in India and Indonesia have reportedly intervened in foreign exchange markets in response.
The direct economic impact of the crisis in Turkey on other EMs should be limited, the report emphasised.
A potentially bigger threat to EMs lies in contagion. History suggests that a crisis in one emerging market can spread to others which share similar vulnerabilities, the report said. This occurred during the Taper Tantrum when the ‘Fragile Five’ (Brazil, India, Indonesia, Turkey, and South Africa), all of which had large current account deficits, suffered the largest currency falls.
“However, as we have argued before, Turkey’s vulnerabilities appear to be unique. Most EMs’ current account deficits have narrowed significantly since the Taper Tantrum and are generally small. Argentina has a precarious external position, but the government’s decision to turn to the IMF for help after a currency crisis in April and May seems to have stabilised the situation there.”
“What’s more, the fragilities in Turkey’s banking sector that are now grabbing attention are more acute than in most other EMs. Among major EMs, only China has seen a larger credit boom over the past decade. And risks there are mitigated to an extent by the fact that lending has been financed by domestic deposits (not by foreign wholesale markets as in Turkey) and a closed capital account.”
That said, this is another headwind facing EMs that has arisen in the past few months. China’s economy is now slowing, EMs are now tightening monetary policy and a trade war is escalating.
“This could worsen investor sentiment towards EMs and also strengthens our view that EMs growth will weaken.”
