JEDDAH: The flight of foreign capital from Egypt will undeniably have a bearing on the entire Middle East. Investors from across the region and beyond have stakes in Egyptian equities, real estate and industrial projects. However, Gulf oil exporters, although not insulated, are less vulnerable to any direct contagion effects, Banque Saudi Fransi (BSF) said in a note Monday. “The wave of unrest in Egypt indirectly exposes Gulf oil exporters to negative investor sentiment, although there is no reason to question the stability of Gulf political regimes nor does it seem likely that economic fundamentals will be shaken,” Dr. John Sfakianakis, chief economist, BSF said in the note. He noted that equities could continue to suffer from selling by foreign investors liquidating regional positions. However, this does create buying opportunities for local investors confident in macroeconomic fundamentals as oil prices rise and global energy demand grows. Saudi Arabia derives the bulk of public revenues from oil exports and demand growth in Asia is likely to enable the country's economy to grow 4.2 percent this year, BSF said. The central bank held SR1.63 trillion ($434.67 billion) in foreign assets as of November. Moreover, the cost of insuring debt through credit default swaps has spiked in Egypt, affecting spreads in other countries, although the impact for most Gulf spreads has been limited, the report said. It forecast that Gulf bond markets would have a minimal adverse effects from Egypt turmoil, although a continuation of the political deadlock could prompt some issuers to postpone their plans. Markets continue to differentiate Middle Eastern countries on their ability to repay debts. Currency regimes in the Gulf remain tied to the US dollar, with no change in this policy on the horizon. The US dollar, viewed as a safe haven, is likely to remain strong should tensions persist or escalate in Egypt, the report noted. Meanwhile, since the Saudi riyal market is the largest and most-liquid in the Middle East, investors worried about contagion have been buying into it in larger numbers. Dollar-Saudi riyal one year forward rates have risen to their highest in around two years, and unlike the typical trend, riyal forwards reflect depreciation in the currency in 12 months. Trading sources indicate that since forwards have traded at a discount for some time, investors are turning to them as a proxy hedge. Similar patterns in demand for USD/SAR occurred during the invasion of Kuwait and first Gulf War in 1990-91. Saudi currency forwards climbed Monday to their highest level since the global crisis hit the Gulf region two years ago as investors hedged their exposure to Egypt, where protests to topple its president entered their seventh day. Gulf oil-exporting countries have avoided violent unrest spreading through a poorer part of the Arab world helped by generous welfare systems. However, fears of Egypt contagion have put their markets under pressure. “There is contagion rippling through the Arab world, a lot of risk aversion and some selling pressure traveling from Egypt to the GCC (Gulf Co-operation Council),” Benoit Anne, head of emerging market strategy at Societe Generale in London, said. “The forwards are volatile, of course there is no hope for the spots to move because of the pegs to the dollar,” he said. Until early last week, forwards pointed to slight firming of the Saudi riyal over the next 12 months. One-year Saudi forwards traded as high as 65 points Monday SR1Y=, the highest level since January 2009 when the Gulf, the world's top crude exporting region, was grappling with the fallout from the global credit crunch. That level, up from -83 points bid before the Egyptian unrest, implies 0.2 percent weakening in the Saudi currency over the next year. The riyal is pegged at 3.75 to the dollar. Dealers said some international banks and hedge funds had been using the riyal as a proxy hedge for their Egypt exposure. Forwards for the United Arab Emirates' dirham AED1Y= were also up Monday, while other Gulf currencies were little affected as low liquidity makes them less attractive for foreign players. “The Saudi is the most traded currency so that is what most of the international players are looking at,” a trader at an UAE bank said. Saudi Arabia's bourse, the largest in the Gulf, was under renewed selling pressure Monday, with the Kingdom's index down 5.3 percent this week. Trading on other stock markets has also been volatile. The cost of insuring Dubai's debt held at 440 basis points on Monday, according to Markit data, near one-month highs. “This is also on the back of Egypt, people are buying a little bit of protection, the CDS (credit default swaps) are higher than what they were one week ago,” said Lyndon Loos, head of MENA forex trading at Standard Chartered in Dubai. “We have to wait and watch what is going on in Egypt. People are assessing the situation on a minute-by-minute basis,” he said. Hence, the events in Egypt thus act as a wake-up call to governments across the Middle East about the pressing need to address serious inadequacies of employment opportunities and income levels, and have shed light on the need to re-build the middle class, which shrunk in size in most countries over the past decade. Emboldened by the success of Tunisians to oust their 20-year ruler, Egyptians are demonstrating against the soaring cost of living, growing poverty and mounting unemployment. According to the UNDP, at least 90 percent of those unemployed in Egypt are under the age of 30. Inflation in Egypt has held in double-digit levels for about three years - surpassing 20 percent in many months in 2008; even now food inflation is around 17 percent. Gulf countries have not faced as steep rates of inflation and in some countries, like Qatar, a deflationary trend persists. Inflation in Saudi Arabia, which had entered double-digit levels in 2008, eased in recent months to 5.4 percent as of December.
