The consequences of fallout from Europe have reduced risk in emerging asset markets, but not all regions will fare equally. Political instability and risk will continue to affect market performance, with the outlook for Egypt, in particular, remaining vulnerable, say analysts at Barclays Capital.
Political uncertainty is rife in Egypt, as the country has been blighted by deadly protests during the past year. Revolutions have spread throughout the Middle East and North Africa (MENA), and Egypt has seen vast changes to its political landscape after the decline of Hosni Mubarak’s 30-year leadership, with Islamist parties winning almost two-thirds of the vote in the recent Egyptian elections.
This political instability coincided with accelerated depletion of the Egyptian pound in October and FX reserves hit record lows. This prompted Central Bank intervention to support the pound and safeguard stability.
“While pressure on the currency in Egypt is increasing, the Central Bank has some tools to fend off a maxi devaluation in the short-term,” says Alia Moubayed, senior economist MENA at Barclays Capital.
The Central Bank of Egypt is expected to continue to hike interest rates and tighten the currency in the local banking system to retain deposits in the coming year. “But still, the future [for Egypt] is very challenging,” says Moubayed. "The uncertain political outlook is complicating a weakening macroeconomic situation."
Other Barclays Capital analysts said, at the launch of their Emerging Markets Quarterly publication, that though the first phase of the election was relatively peaceful, “political volatility is likely to remain elevated ... and the volatile political situation brought to the fore Egypt’s increasingly vulnerable external position".
Although Egypt may face market volatility in the coming year, Barclays Capital said it will be taking a “more constructive stance toward emerging market asset markets on valuation grounds and on the view that eurozone policymakers are at last converging on a policy framework that can restore financial stability in the region”. Forecasts by its analysts for next year state that performance will be best in emerging markets, where there is more capital, greater liquidity and stronger economic growth.
However, as Christian Keller, head of emerging EMEA research at Barclays Capital, says: “When we look at how emerging markets are going to perform next year, inevitably we need to take on a world view.”