LONDON: Turkey, Oman, Pakistan and Ethiopia are among emerging markets that could be most hurt as central banks in developed countries raise interest rates, according to a report from S&P, the credit rating agency.
In its global sovereign rating outlook for 2018, S&P highlights the danger for emerging markets of accelerated interest rate rises in the years ahead, leading to capital outflows from emerging market securities and a reduction in direct foreign investment (FDI).
That could badly damage the economic model of some emerging economies, but to what extent remains to be seen, said the report.
According to S&P, the emerging market sovereigns most at risk from faster-than-expected monetary tightening are, in descending order: Venezuela, Bahamas, Mozambique, Montenegro, Turkey, Ethiopia, Pakistan, Kenya, Oman and Sri Lanka. Among the large emerging markets, Turkey appears the most exposed at No. 5, said S&P.
The agency said as the recovery of advanced economies gains breadth and depth, including in the euro zone, inflationary pressures could rise and trigger faster monetary normalization (higher rates) by the leading central banks than currently envisaged by the market.
The rub here, as S&P goes on to explain, is that foreign investors would then be sorely tempted to withdraw some invested funds from emerging markets to put back into advanced economies’ securities, which will provide higher real returns than they do currently.
S&P said: “Even relatively small shifts back to advanced economies’ securities relative to their outstanding volume can have a meaningful impact on emerging markets. This is because the capital market is simply so much larger in the advanced economies.”
In recent years, there have been unprecedented portfolio flows into emerging markets shares and other investment instruments that help those countries fund development and secure prosperity.
“But they also create a development model that is dependent on external financing conditions. This renders them vulnerable to sudden stops of capital inflows and possible reversals,” said S&P.
The Institute of International Finance (IIF) estimates that nonresident net portfolio inflows to emerging markets will reach a record $340 billion this year, followed by $435 billion in 2018. In comparison, the average for 2013-2016 was $200 billion.
Excluding flows into China, the average net inflows into emerging markets will still be
63 percent higher in 2017 than the average of 2013-2016, said IIF.
Added to these portfolio inflows are sizeable nonresident FDI inflows of close to $500 billion.
S&P said: “Portfolio inflows have grown particularly fast in recent years. And it is these portfolio flows that can be more volatile, potentially reversing direction very rapidly when confidence wanes or alternative investment opportunities open up.”
There is a strong correlation between vulnerability to monetary tightening and the sovereign rating.
According to S&P, the average rating of the 10 most vulnerable sovereigns is “B” and none of them carry an investment-grade rating. At the other end of the spectrum, the average rating of the 10 most resilient sovereigns is “BBB,” it said.
Turkey, Oman vulnerable if central banks hike rates too steeply, says S&P
Turkey, Oman vulnerable if central banks hike rates too steeply, says S&P
Closing Bell: Saudi benchmark index closes lower at 10,540
RIYADH: Saudi equities ended Wednesday’s session lower, with the Tadawul All Share Index falling 55.13 points, or 0.52 percent, to close at 10,540.72.
The sell-off was mirrored across other indices, with the MSCI Tadawul 30 Index retreating 5.79 points, or 0.41 percent, to close at 1,393.32, while the parallel market Nomu slipped 74.56 points, or 0.32 percent, to 23,193.21.
Market breadth remained firmly negative, as decliners outpaced advancers, with 207 stocks ending the session lower against just 51 gainers on the main market.
Trading activity moderated compared to recent sessions, with volumes reaching 123.5 million shares, while total traded value stood at SR2.72 billion ($725.2 million).
On the sectoral and stock level, Al Moammar Information Systems Co. led the gainers after surging 9.96 percent to close at SR172.30, extending its rally following a series of contract announcements tied to data center and IT infrastructure projects.
Al Masar Al Shamil Education Co. climbed 4.89 percent to SR27.48, while Naqi Water Co. advanced 3.36 percent to SR58.50. Al Yamamah Steel Industries Co. and Al-Jouf Agricultural Development Co. also posted solid gains, rising 3 percent and 2.86 percent, respectively.
Losses, however, were concentrated in industrial names. Saudi Kayan Petrochemical Co. fell 3.67 percent to SR4.73, while Makkah Construction and Development Co. slid 3.44 percent to SR80.
Saudi Tadawul Group Holding Co. retreated 3.28 percent to SR147.50, weighed down by broader market weakness, and Saudi Cable Co. declined 3.18 percent to SR143.
Alkhaleej Training and Education Co. rounded out the top losers, shedding just over 3 percent.
On the announcement front, BinDawood Holding announced the signing of a share purchase agreement to acquire 51 percent of Wonder Bakery LLC in the UAE for 96.9 million dirhams, marking a strategic expansion of its food manufacturing footprint beyond Saudi Arabia.
The acquisition, which remains subject to regulatory approvals, is expected to support the group’s regional growth ambitions and strengthen supply chain integration.
BinDawood shares closed at SR4.68, up 0.43 percent, reflecting a positive market reaction to the overseas expansion move.
Meanwhile, Al Moammar Information Systems disclosed the contract sign-off for the renewal of IT systems support licenses with the Saudi Central Bank, valued at SR114.4 million, inclusive of VAT.
The 36-month contract is expected to have a positive financial impact starting from fourth quarter of 2025, reinforcing MIS’s position as a key technology partner for critical government institutions. The stock surged to the session’s limit making it the top gainer.
In a separate disclosure, Maharah Human Resources confirmed the completion of the sale of its entire stake in Care Shield Holding Co. through its subsidiary, Growth Avenue Investments, for a total consideration of SR434.3 million.
The transaction involved the transfer of 41.36 percent of Care Shield’s share capital to Dallah Healthcare, with Maharah receiving the full cash proceeds.
Despite the strategic divestment, Maharah shares closed lower, ending the session at SR6.12, down 1.29 percent.
