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 main market closes the week in red at 10,526
RIYADH: Saudi equities ended Thursday’s session modestly lower, with the Tadawul All Share Index slipping 14.63 points, or 0.14 percent, to close at 10,526.09.
The MSCI Tadawul 30 Index also declined 3.66 points, or 0.26 percent, to 1,389.66. In contrast, the parallel market outperformed, as Nomu jumped 237.72 points, or 1.02 percent, to close at 23,430.93.
Market breadth on the main market remained tilted to the downside, with 156 stocks ending lower against 99 gainers.
Trading activity eased further, with volumes reaching 80.46 million shares and total traded value amounting to SR1.66 billion ($442 million).
On the movers’ board, Saudi Industrial Export Co. led the gainers, rising 6.6 percent to SR2.10, followed by Consolidated Grunenfelder Saady Holding Co., which advanced 6.43 percent to SR9.60.
Raoom Trading Co. climbed 4.36 percent to SR61.05, while Astra Industrial Group gained 4.35 percent to close at SR139. Riyadh Cables Group Co. added 3.77 percent to end the session at SR135.00.
On the downside, Methanol Chemicals Co. topped the losers’ list, falling 5.96 percent to SR7.41.
Flynas Co. retreated 5.43 percent to SR61.00, while Leejam Sports Co. dropped 5 percent to close at SR100.80.
Alramz Real Estate Co. slipped 4.64 percent to SR55.50, and Almasane Alkobra Mining Co. declined 4.55 percent to SR84.00.
On the announcement front, ACWA Power said it has completed the financial close for the Ras Mohaisen First Water Desalination Co., a reverse osmosis desalination project with a capacity of up to 300,000 cubic meters per day, alongside associated potable water storage facilities totaling 600,000 cubic meters in Saudi Arabia’s Western Province.
The project was financed through a consortium of local and international banks, with total funding of SR2.07 billion and a tenor of up to 29.5 years, while ACWA Power holds an effective 45 percent equity stake.
Shares of ACWA Power ended the session at SR185.90, up SR0.2, or 0.11 percent.
Meanwhile, Consolidated Grunenfelder Saady Holding Co. announced the sign-off of a customized solutions project with Saudi Aramco Nabors Drilling Co., valued at SR166.0 million excluding VAT.
The 24-month contract covers the sale and maintenance of field camp facilities, with the financial impact expected to begin from the first quarter of 2026.
