MENA FX: Funding gaps and current account stress – BNY

BNY Mellon’s Geoff Yu highlights significant portfolio outflows from Middle East/North Africa (MENA) markets and warns that external funding gaps are likely to widen. Oil exporters face weaker export earnings and inflexible exchange rates, while non-oil economies confront higher import costs and structural current account deficits. Nonetheless, Egypt’s reforms and retrenching domestic demand provide buffers, and funding gaps should remain manageable with appropriate policy execution.

Outflows pressure MENA balances but buffers exist

"Unsurprisingly, our custody data have flagged material outflows from Middle East and North African (MENA) markets. Outflows that generate risk aversion aside, the risk premium required to attract portfolio inflows is likely to be higher from a simple balance-of-payments perspective. For the oil-exporting economies, a sharp drop in export earnings for relevant products, in addition to services spend in the region, requires a significant near-term discount based on cashflows alone."

"These economies also lack a flexible exchange rate to compensate. For non-oil-based economies, higher import costs are a major factor. We’re also concerned that more downstream products will aggregate structural current account deficits."

"Despite current flow stress, we would avoid drawing comparisons with 2022-2023 for now. One key differentiator is that domestic demand – especially fiscal – has been retrenching for several quarters, which, on the margins, alleviates financial stress from a drop in funding."

"Furthermore, for Egypt, a key frontier market, reforms, including in exchange rate formation, have helped stabilize expectations and ensure a high starting point for real rates. Consequently, on a 12-month rolling basis, local asset markets have managed to generate a significant buffer to limit balance-of-payments risks for now."

"We expect funding gaps to remain large in the near term, but the levels are not insurmountable with the right fiscal and monetary policy execution."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)