Dependence on oil, high inflation rates and external debt are some challenges frontier and emerging markets in the MENA regions face
Investor sentiment in the MENA market this year is better compared to last year, mainly because of expectations of a recovery in global liquidity and a soft landing in the US, a senior EFG Hermes official told Economy Middle East.
Speaking on the sidelines of the 18th annual EFG Hermes One-on-One Conference, Ahmed Shams, managing director and head of research at EFG Hermes, also shed light on the challenges the MENA market faces, and how they differ from other emerging markets. He also highlighted some of the significant factors that MENA markets need to consider when managing risk to achieve growth.
EFG Hermes, an EFG Holding company and an investment bank in the Middle East and North Africa (MENA), in collaboration with the Dubai Financial Market (DFM), officially inaugurated the conference on Monday. The conference, one of the world’s largest that discusses the Middle East and North Africa (MENA) region, explores frontier emerging markets in the region and delves into the investment potential of the region.
EFG Hermes One-on-One Conference
The annual conference centers around the theme ‘Exploring the Depth of Frontier Emerging Markets (FEM)’. It takes a deep dive into the inherent potential of the region and offers insights and networking opportunities for participants. Moreover, it holds discussions on frontier and emerging markets in the region and their potential.
“Generally, companies participate in the conference to market themselves in front of new institutional investors and update existing investors about their business strategies, and operational and financial plans,” Shams said.
The conference aims to focus on fostering dialogue and collaboration between global investors and listed companies in the MENA region. Moreover, it aims to uncover promising investment opportunities while addressing key challenges in the region’s markets.
Currency peg brings stability
Shams highlighted several challenges that frontier and emerging markets in the MENA regions face. These include their dependence on oil, high inflation rates, and external debt.
The exposures to global uncertainties, however, vary for MENA markets, Shams added. The Gulf Cooperation Council (GCC) currencies are pegged to the U.S. dollar and this offers relative stability. Moreover, it makes for a safe haven for investors in their emerging markets. “The main challenge is the speed at which these markets would diversify away from oil and create an attractive domestic-driven story for global investors,” adds Shams.
Egypt’s market
Commenting on Egypt’s market, Ahmed Shams stated: “Egypt’s challenges mainly stem from soaring twin deficit, soaring external debt and private sector growth. The recently announced mega foreign direct investment (FDI) on the north coast can help policymakers redirect the economy towards competitiveness and growth.”
ADQ, an Abu Dhabi-based investment and holding company, has revealed plans to invest $35 billion in Egypt’s north coast. The company will acquire the development rights for Ras El-Hekma for $24 billion. Moreover, ADQ will convert $11 billion worth of deposits that will be utilized for investment in prime projects across Egypt.
This master plan will help attract foreign direct investment, boost trade, support Egypt’s private sector via an in-country localization program, and drive job creation to maximize economic benefits.
Achieving growth in MENA markets
There are several significant factors that MENA markets need to consider when managing risks to achieve growth. According to Shams, one of the most prominent factors is centralized funding. Money and financing operations have traditionally been centralized functions, typically overseen by banks, regulatory bodies, and governments.
These institutions may be less inclined to support innovative or high-risk projects, opting instead for safer investments that align with government or regulatory priorities. This can stifle entrepreneurship, hinder technological advancement, and impact the overall economy. “An active debt capital market is needed to decentralize funding sources and help boost financial agility and improve domestic saving tools that will be reflected very positively on the economy,” states Ahmed Shams.
Decentralized financing brings several advantages, including increased transparency in financial markets by reducing intermediation, and making the system more accessible. This transparency benefits investors and financial service users.
Navigating economic dynamics
Shams also spoke about how developed economies have grappled with issues like labor shortages and inflation, whereas emerging economies have managed to evade these challenges to some degree. In the MENA region, countries like those in the GCC largely mirror the monetary policies of the United States, primarily due to their currency pegs, he said. However, despite this alignment, inflation rates may occasionally diverge, leading to the mispricing of certain asset classes in the market. Nevertheless, the GCC nations benefit from substantial foreign assets that continue to support their currency pegs, Shams explained. These assets not only bolster liquidity in the domestic market but also contribute to investments aimed at nurturing local talent pools and attracting global expertise to drive transformation programs.
Shams sees Saudi Arabia and the UAE making record gains this year because of their strong fundamentals.
Read: Currency pegging: Overview, pros and cons
MENA investor sentiment
Investor sentiment in the region has improved compared to last year, largely driven by expectations of a global liquidity recovery and a smooth economic soft landing in the United States. “This is particularly positive for Dubai, which had the exposure to emerging market cycles compared to its GCC counterparts,” stated Shams. Meanwhile, in Saudi Arabia, investors are enthusiastic about the ongoing social and economic transformation, as the country continues to meet its ambitious targets, exceeding expectations.
Commenting on Kuwait’s investment landscape, Shams stated: “In Kuwait, investors are cautiously optimistic about the economic agenda of the new political regime and expect more IPOs in the market.” However, in Qatar, investors appear to be adopting a wait-and-see approach, as the extensive infrastructure projects come to a close and liquefied natural gas (LNG) prices stabilize. “The north field project should re-energize credit growth with a trickle-down positive effect on the private sector,” added Ahmed Shams.
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