The coronavirus pandemic is the biggest economic shock to hit the global economy in decades. Currencies in the Middle East and North Africa (MENA), like those across emerging markets, have come under pressure this year, reflecting concerns about the region’s external vulnerabilities, its weak economic outlook and the political and financial capacity of certain governments to manage the crisis.
Multiple pressures on external finances include lower export earnings for commodity producers, plummeting non-oil goods exports earnings and services earnings from tourism, deep remittance losses due to stalled economic activity, massive portfolio outflows and reduced potential for foreign direct investment (FDI) inflows. More vulnerable economies have already seen their foreign reserves come under considerable pressure. An uncertain political environment, poor economic management and broader adverse conditions for emerging-market currencies are all weighing heavily on currencies.
However, the pain is not evenly spread, with Israel and most of the Gulf Co‑operation Council (GCC) states likely to weather the storm relatively comfortably because of their solid foreign asset bases, more prudent economic management going into the crisis and greater bond market access.
Overall, with external finances under pressure and the US dollar strong, most MENA currencies will weaken in 2020, with only modest bounce-backs in 2021. We expect that currency pegs in major oil‑exporting countries will be maintained, but elsewhere there will be significant readjustments.
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The aggregate current account of MENA countries will shift from a surplus of US$78.2bn (equivalent to 2.1% of regional GDP) in 2019 to a massive deficit of US$190bn (5.7% of GDP) and will remain in deficit until 2022, with Israel the sole country in the region to record a current-account surplus in 2020. Goods export earnings in the region will not return to 2019 levels until 2024 because of both low oil prices in 2020‑21 and reduced global demand for other key non-oil exports from the region. In the first wave of the crisis as the pandemic spread across the globe, there were massive outflows from emerging markets and considerable strain placed on MENA currencies as funds exited to safe haven locations. MENA governments have cut policy interest rates to ease domestic liquidity conditions but this has further reduced their markets’ attractiveness for capital inflows. The Institute of International Finance recorded the largest outflow from emerging markets of non-resident portfolio flows ever in the first quarter of 2020. With pressure on both the capital and the current accounts, reserves have taken a knock and exchange rates for MENA countries have come under stress.
Conversely, in Lebanon and Syria the weight of years of economic mismanagement, political division and conflict have already pushed their currencies close to the brink with the pandemic’s economic fallout deepening these crises.
Lebanon’s currency is in free fall as the country was already crippled by an extended political and financial crisis that had seen the sovereign default in March, with the pandemic placing additional stress on the currency. The Lebanese government is belatedly trying to push through reforms—the government requested a massive US$10bn IMF programme in May—but politicians, the Banque du Liban (BdL, the central bank) and the country’s commercial banks, which hold the majority of the government’s debt, are at loggerheads. In the meantime, the currency peg of L£1,507.5:US$1 in place since 1997 has become increasingly untenable. Foreign-currency deposits that had been crucial to maintaining access to hard currency have slipped away and the parallel rate has drifted further. The parallel rate has moved from about L£2,500:US$1 in early 2020 to L£4,500:US$1 at about the time of the sovereign default to about L£6,200:US$1 by late June. The gap has widened even as the central bank has injected liquidity, depleting its once plentiful foreign-exchange reserves, and sought to limit the amount of access to US dollars to low levels or at a new market rate. Concerns from prospective multilateral and bilateral supporters over the capacity of Lebanon to channel the funds appropriately and over the closeness of the government to the Iranian-backed Hizbullah movement have also stalled the process.
Our expectation is that the BdL will be forced to abandon the currency peg in 2020. To comply with IMF conditions, the central bank will be forced to float the currency to eliminate the extreme differential between the official and the black-market rates, but the adjustment will be slow and arduous, compounded by the depth of Lebanon’s political and structural problems.
Currencies in North Africa will continue to come under considerable strain, largely because of the effects of the pandemic on emerging-market financial flows and on real economic activity and export performance in those countries. Although the main hydrocarbons producers in the region, Algeria and Libya, will face considerable strains, the non-oil producers will have access to broad multilateral and bilateral support as a backstop and should therefore be able to avoid full-blown currency crises.
Egypt’s external financial position was manageable at the outset of the crisis, with foreign reserves above eight months of import cover. The authorities initially tried to hold on to hard-won currency stability by reactivating a foreign-exchange repatriation mechanism and meet commitments out of its foreign reserves as foreign portfolio investors withdrew funds. These efforts kept the Egyptian pound relatively stable given the extent of market strains but would have been unsustainable in the longer term. Egypt went through US$9.6bn of its foreign reserves in March-May—some 20% of the total—in a bid to protect the pound. Egypt has been able to rebuild its buffers somewhat since May, however, with US$2.8bn in RFI support from the Fund and a new 12‑month SBA totalling US$5.2bn in late June as well as raising US$5bn in bonds. The currency fell from around E£15.75-15.80:US$1 for much of April and mid-May (compared with about E£15.6:US$1 in February) to a low of E£16.27:US$1 in early June before stabilising at slightly stronger levels at the end of the month. It is likely that the authorities would have anticipated that the IMF would have called for restoring exchange-rate flexibility as part of the SBA conditions. We expect the currency will trade at about this weaker level before restoration of economic activity and increased earnings from gas and other foreign-currency streams help to support renewed appreciation later in the forecast period.
On the other hand, Algeria’s poor economic management and failure to reform meant that the country’s strategic fiscal reserves were all depleted in the previous oil price crash in 2014‑16 and foreign reserves have been steadily declining in the years since, and are now less than a third of their pre‑2014 peak. This has placed Algeria in a weak position going into the crisis. With oil prices collapsing once more and other sources of income such as remittances also damaged, the external position is worsening again. The Algerian dinar remains vulnerable, with the gap between the official and the market rate for both the euro and the US dollar opening up.
For the rest of the region, those countries where governments have stronger relationships with key bilateral and multilateral supporters or a recent history of economic reform should also be able to ride out the coronavirus storm, albeit with their currencies considerably weakened. For those countries already under high stress, the pandemic could represent the final nail in the coffin for their currencies and a radical overhaul of their financial systems. In those countries that have taken more decisive action over the economic and public health management of the crisis and that have been swift to secure international assistance, currencies should broadly stabilise, although some continued volatility is likely.
Across the MENA region, economic risks will remain fairly high. Failure to control the pandemic could drive renewed financial market strains and may force governments to implement new lockdown measures, even for a short period. These challenges, coupled with persistently weak business and consumer confidence, will weigh on the regional currency outlook.
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