Many of the emerging markets’ biggest financial crises have followed a pattern in the past two decades, one that Egypt might be well advised to take careful note of.
The usual scenario has been for the country in question to insist on keeping its currency strong against international currencies, particularly the US dollar.
The argument has been that a slide in the currency’s value would make imports more expensive, thus igniting generalised inflation in the economy and making life difficult for citizens. Another occasionally offered argument is that local companies have built up debt in foreign currencies, and a fall in the local currency might make them insolvent.
But after a time, the artificially strong currency weakens the country’s finances and the central bank begins drawing down its international foreign currency reserves to continue supporting its currency until some sort of economic shock brings the structure down.
The final stage is generally a bailout package, often provided by the IMF.
Egypt’s own currency crisis was caused by a political and economic shock – a popular uprising in 2011 that led investors to pull their money out of Egyptian pounds and caused its main source of foreign currency, tourism, to dry up.
The crisis has yet to run its course, with the risk that some sort of shock could destabilise the economy.
Rather than allow the Egyptian pound to weaken, the country’s central bank chose to keep its official price steady by drawing down foreign currency reserves, which stood at US$36 billion in 2011.
It did so in the belief that the crisis was temporary and that any devaluation would exacerbate inflation.
It also worried that any sign of weakness in the currency risked sparking a rush to US dollars, causing the Egyptian pound’s intrinsic value to spiral downwards.
The controls seem to have become semi-permanent. As Egypt’s foreign currency reserves dwindle, the country’s central bank imposed ever-increasing controls on the purchase of foreign exchange.
One hopes that the government will continue to press ahead with economic reforms and allow the currency to weaken. That is because the precedents for propping up a country’s currency do not augur well. Consider the cases of Mexico, Thailand and Malaysia.
In Mexico, the government in early 1994 ramped up its issuance of peso-denominated short-term treasury bills, but with returns tied to the US dollar. The bills were snapped up by foreign investors, especially after Mexico joined the North American Free Trade Agreement on January 1, 1994.
But it was an election year, and political turmoil – including the rise of the Zapatista rebel insurgency and the assassination of a presidential candidate – began undermining confidence. The central bank started issuing dollar-denominated treasury bills to buy pesos, supporting the currency. The government feared that if the peso fell, the electorate would be angered by the ensuing price increases.
Sensing that the peso was overvalued, foreign and Mexican investors began shifting their funds out of the peso, further weakening the currency.
The central bank began to spend its foreign currency reserves to defend the peso, and it ran out of dollars entirely by December 1994. As investors fled the peso, the government in December was forced to float the peso, and it fell by about 30 per cent that month.
Mexico signed a bailout package with the IMF the next month, topped up with funds from the US government and others for a total US$50bn.
Eventually the peso regained some of its value, but the economy, which had grown 4.8 per cent in 1994, shrank 6.2 per cent in 1995 in its worst economic crisis since the 1930s. Economic growth recovered to 5.1 per cent in 1996.
Less than three years later, Thailand was hit by currency speculators. The baht had been pegged against a basket of currencies at a level stronger than the market price.
The Thai government was afraid that a weaker baht would cause the price of imports to rise, hurting consumers, and that companies that had borrowed heavily in foreign currencies would not be able to repay their debts. In six months, the Thai government drew down its foreign currency reserves to $30.9bn in June 1997 from $37.2bn in December 1996. It raised interest rates to as high as 24 per cent.
Investors transferred billions of dollars out of the country. When the baht was floated on July 2, 1997, it weakened from 25 bahts to the dollar to 55 in January 1998. The Thai government later signed a $17.2bn bailout agreement with the IMF.
Thailand’s GDP growth fell from 5.9 per cent in 1996 to minus 1.4 per cent in 1997 and minus 10.5 per cent in 1998, but recovered strongly in 1999.
The country’s financial crisis sparked a similar shock in Malaysia, which had relatively little foreign debt and did not feel the need to seek the IMF’s help, but it deployed many IMF-influenced measures.
Malaysia raised interest rates, floated the ringgit and cut government spending by 18 per cent. The ringgit plunged to 4.9 to the dollar in January 1998, from 2.4 in 1997.
In 1998, Malaysia adopted an unorthodox policy mix of pegging the ringgit against the US dollar, enacting foreign-exchange controls and putting deficit financing in place to reflate domestic demand.
Its GDP shrank 6.7 per cent that year, compared to an expansion of 7.7 per cent in 1997. The economy recovered in 1999.
Patrick Werr has worked as a financial writer in Egypt for 25 years.
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Navdeep Suri, India's Ambassador to the UAE
There has been a longstanding need from the Indian community to have a religious premises where they can practise their beliefs. Currently there is a very, very small temple in Bur Dubai and the community has outgrown this. So this will be a major temple and open to all denominations and a place should reflect India’s diversity.
It fits so well into the UAE’s own commitment to tolerance and pluralism and coming in the year of tolerance gives it that extra dimension.
What we will see on April 20 is the foundation ceremony and we expect a pretty broad cross section of the Indian community to be present, both from the UAE and abroad. The Hindu group that is building the temple will have their holiest leader attending – and we expect very senior representation from the leadership of the UAE.
When the designs were taken to the leadership, there were two clear options. There was a New Jersey model with a rectangular structure with the temple recessed inside so it was not too visible from the outside and another was the Neasden temple in London with the spires in its classical shape. And they said: look we said we wanted a temple so it should look like a temple. So this should be a classical style temple in all its glory.
It is beautifully located - 30 minutes outside of Abu Dhabi and barely 45 minutes to Dubai so it serves the needs of both communities.
This is going to be the big temple where I expect people to come from across the country at major festivals and occasions.
It is hugely important – it will take a couple of years to complete given the scale. It is going to be remarkable and will contribute something not just to the landscape in terms of visual architecture but also to the ethos. Here will be a real representation of UAE’s pluralism.
Zayed Sustainability Prize
NO OTHER LAND
Director: Basel Adra, Yuval Abraham, Rachel Szor, Hamdan Ballal
Stars: Basel Adra, Yuval Abraham
Rating: 3.5/5
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Opening day UAE Premiership fixtures, Friday, September 22:
- Dubai Sports City Eagles v Dubai Exiles
- Dubai Hurricanes v Abu Dhabi Saracens
- Jebel Ali Dragons v Abu Dhabi Harlequins
What is a black hole?
1. Black holes are objects whose gravity is so strong not even light can escape their pull
2. They can be created when massive stars collapse under their own weight
3. Large black holes can also be formed when smaller ones collide and merge
4. The biggest black holes lurk at the centre of many galaxies, including our own
5. Astronomers believe that when the universe was very young, black holes affected how galaxies formed
Seemar’s top six for the Dubai World Cup Carnival:
1. Reynaldothewizard
2. North America
3. Raven’s Corner
4. Hawkesbury
5. New Maharajah
6. Secret Ambition
Miss Granny
Director: Joyce Bernal
Starring: Sarah Geronimo, James Reid, Xian Lim, Nova Villa
3/5
(Tagalog with Eng/Ar subtitles)
A MINECRAFT MOVIE
Director: Jared Hess
Starring: Jack Black, Jennifer Coolidge, Jason Momoa
Rating: 3/5
Tightening the screw on rogue recruiters
The UAE overhauled the procedure to recruit housemaids and domestic workers with a law in 2017 to protect low-income labour from being exploited.
Only recruitment companies authorised by the government are permitted as part of Tadbeer, a network of labour ministry-regulated centres.
A contract must be drawn up for domestic workers, the wages and job offer clearly stating the nature of work.
The contract stating the wages, work entailed and accommodation must be sent to the employee in their home country before they depart for the UAE.
The contract will be signed by the employer and employee when the domestic worker arrives in the UAE.
Only recruitment agencies registered with the ministry can undertake recruitment and employment applications for domestic workers.
Penalties for illegal recruitment in the UAE include fines of up to Dh100,000 and imprisonment
But agents not authorised by the government sidestep the law by illegally getting women into the country on visit visas.
Citadel: Honey Bunny first episode
Directors: Raj & DK
Stars: Varun Dhawan, Samantha Ruth Prabhu, Kashvi Majmundar, Kay Kay Menon
Rating: 4/5
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
