Photographer: Kostas Tsironis/Bloomberg

Rates, Reserves and Perhaps a Float: A Guide to MENA Central Banks

  • Saudi Arabia must mitigate impact of future U.S. rate hikes
  • Egypt may lower borrowing costs with inflation finally easing

After a year of rising U.S. interest rates and political volatility that drove up borrowing costs in much of the Middle East and North Africa, the region’s central banks have more divergent goals in 2018.

From a new easing cycle in Egypt, political pressure in Turkey and a potential currency float in Morocco, below is a guide to what to look for:


Even after Turkey missed its inflation target for the seventh year in 2017, few expect central bank Governor Murat Cetinkaya to further tighten monetary conditions against a backdrop of frequents calls from President Recep Tayyip Erdogan for lower interest rates.

The case for policy inaction stems partly from Cetinkaya’s insistence that inflation will slow from 11.9 percent to 7 percent by the end of this year, bringing it closer to the long-term target of 5 percent. With growth expected to slow this year, the bank will also have to keep an eye on investor appetite for Turkish assets amid rising rates in the U.S., according to Inanc Sozer, a managing director of Istanbul-based Turkey Macro View Consulting.

“We won’t see any central bank action unless we see further record lows in the lira,” Sozer said. “The bank will opt for a wait-and-see policy” as it tries to get a sense of how price gains are easing, he said.

Saudi Arabia

Saudi Arabia has pledged to maintain its currency peg to the dollar and is expected to track rate increases by the U.S. Federal Reserve. The problem for the Saudi Arabian Monetary Authority, as the regulator is known, is that higher lending costs are not ideal for an economy that probably contracted 0.5 percent last year.

SAMA will likely raise the reverse repo rate to 1.75 percent after the next U.S. rate increase and then lift both ends of its rates corridor in lockstep with the Federal Reserve, according to Ziad Daoud, a Dubai-based analyst with Bloomberg Economics. It may then inject liquidity or change reserve requirement ratios to avoid a spike in market rates, he said.

Having issued bonds last year, the regulator can also use open-market operations -- buying and selling securities to influence borrowing costs -- if needed, Governor Ahmed Alkholifey has said.


Egypt is expected to cut interest rates this year with inflation, which spiked after authorities floated the pound in 2016, finally slowing. The pound has since stabilized, and though higher interest rates helped attract about $19 billion to Egyptian Treasury bills, they’ve also hurt businesses seeking credit.

The benchmark interest rate may drop to 13.25 percent from 18.75 percent by year-end, according to London-based Capital Economics. Headline inflation, which fell to 26 percent in November from 30.8 percent a month earlier, may slow to 13 percent in the fourth quarter, according to the central bank.

Easing may begin in the first quarter, according to Hany Farahat, a Cairo-based economist at CI Capital Holding. Even so, an exodus of foreign investors is unlikely because longer-term securities will remain attractive, he said.


Officials have said shifting to a flexible currency regime -- the dirham is pegged 60 percent to the euro and 40 percent to the U.S. dollar -- would help make Morocco a regional financial hub and a business gateway to Africa. The International Monetary Fund agrees, and has urged the government to begin “as soon as possible.”

But after the central bank finished its preparations, authorities balked at taking the plunge amid fears among businesses that the dirham would plummet. The decision is now with Prime Minister Saad-Eddine El Othmani, and it’s not clear if the politics are shifting.

The good news, said Renaissance Capital global chief economist Charles Robertson, is that the economy is doing “excellently.” The IMF sees growth slowing to 4 percent this year from 4.4 percent in 2017, with agriculture key to the final result. Robertson expects only minor changes to the currency regime in 2018, save for a limited widening of trading bands that “will make little practical difference” to investors.


The political crisis -- and bond sell-off -- following the resignation of Prime Minister Saad Hariri in November reminded investors of Lebanon’s vulnerability to turmoil, and reliance on remittances. They underpin government spending, which includes a $1.2 billion stimulus package to boost an economy forecast by the IMF to grow at 2 percent this year.

One problem for the central bank is that raising rates to attract more inflows could contradict efforts to support growth. The regulator has instead relied on financial engineering, swapping its local-currency Treasury bills for Eurobonds held at the Finance Ministry and then selling the notes to local lenders in exchange for dollars. Its foreign-exchange reserves rose to a record last year, and analysts expect similar tactics in 2018.

“The central bank’s reserves are solid enough to withstand shocks, and the focus in the past has been and will continue to be in 2018 keeping the reserve level adequate,” said Carla Slim, an economist for the Middle East and North Africa at Standard Chartered Plc.

— With assistance by Dana Khraiche

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