Non-resident capital inflows to the Mena region are projected to rise from $165bn last year to $200bn in 2019 before moderating to $173bn in 2020. With the increasing capital flows, inclusion into global benchmark indices, and ongoing reforms, the Mena region is taking a more prominent place on the Emerging Market (EM) investment map.
Unlike in other emerging markets where capital flows dynamics have been significantly affected by global monetary easing and trade tensions, the main driving factor behind this year’s foreign capital inflows to Mena has been global benchmark index upgrades in the GCC. As in previous years, investments abroad by the GCC sovereign wealth funds continue to drive resident capital outflows, which we project at $252bn this year, Institute of International Finance (IIF) noted.
Portfolio investments, supported by equity index inclusions and debt issuance, remain the key driver of capital inflows to the region. From the perspective of debt flows, declining interest rates and large fiscal financing needs in the context of lower oil prices will keep Eurobond issuance at high levels.
Against the broad picture of weak flows to EMs, IIF foresees foreign inflows to Mena oil exporters increasing significantly from $115bn in 2018 to $157bn this year and tapering off to $133bn next year.
Portfolio flows, both in equity and debt, remain the key drivers of capital inflows to the GCC. Earlier this year, five GCC states, including Qatar, joined J.P. Morgan’s emerging markets bond indexes (EMBI), with a total weight of 11.3 percent. These upgrades are expected to make an important contribution to expanding the investor pool and developing capital markets in the GCC.
Sovereign Eurobond issuance continues to dominate the bond market. A dovish Fed, investors’ search for yield, and higher fiscal financing needs due to lower oil prices will serve as supporting factors for bond issuance in 2020. With global negative-yielding debt hovering around $15 trillion, the GCC debt market is becoming increasingly appealing to foreign investors. Large financial buffers in the GCC countries including Qatar and Kuwait, solid returns, and a natural currency hedge given the dollar pegs make debt an attractive alternative to riskier securities in other EMs, especially in times of elevated volatility.
However, investors show two major concerns about GCC debt. First, given that the GCC bonds performed well recently, portfolio managers may see valuations as stretched. Second, relatively low yields indicate that the markets are not fully pricing geopolitical and security risks in the region.
Capital outflows from the GCC will continue to exceed nonresident capital inflows, despite the narrowing of the current account surplus.
