Will the New US Federal Reserve Changes Mean Salvation or Nightmare for Egyptian's Wallets
The beginner's guide to international finance and how recent actions at the world's most powerful bank will directly affect Egyptian wallets.
Yesterday, the Federal Reserve rose US interest rates by 25 points, but what does this have to do with Egypt? Raising interest rates have always had a ripple effect that hurt emerging economies like Egypt. While internationalist Obama hesitated, realising the world economic recovery is connected to the US’s, isolationist Trump does not share his predecessor’s nuanced approach. We’ll take you through the two scenarios that Egypt, and emerging economies, face after this decision and some investment tips so you can quit your job to enjoy an early retirement.
The last time the Federal Reserve increased rates in December, the fallout from the decision sent a shock wave of instability through the global emerging market resulting in $30 billion leaving developing economies overnight. Rates were set to increase when the Federal Reserve met earlier in 2017, but policy makers postponed the hike due to increased volatility; following the Brexit vote, Trump’s election, continued instability, and shaky growth in many emerging markets. However, the US feels they have to make some monetary changes; especially considering Trump’s “America First” policy.
An increase in the Federal Reserve’s interest rates could result in several issues for emerging markets which could have a particular sting if economic conditions are already tight. In a working paper published by an economist at the Institute for International Finance, Rebin Keopke, claimed that the Federal Reserve policy could even spawn a banking or debt crisis in developing countries.
Tightening US monetary policy can contribute to increased capital flight, decreased asset value, decreased investment incentives, constrained availability of currency, more expensive lending rates, and higher debt repayments, which could spell doom for countries that do not have the fiscal health to weather the storm, i.e Egypt.
“The countries that are most vulnerable are those whose own economic and financial conditions are in less than good shape… countries with large current account deficits, large fiscal deficits, higher rates of inflation, and exchange rates that are not being allowed to respond to current economic and financial conditions,” according to Keopke’s report. Egypt has already seen the exchange rate move from EGP 15.75 to 18.10, largely due to the movements at the Fed.
Only time can tell if Egypt's dangerous economic position will lead to a major crisis, there is another option. A unique moment in modern history has taken place in the last year, that Trump, Brexit, a new referendum on Scotland, the EU's questionable survival, and the rise of right-wing economic nationalism has made Egypt and other emerging markets great by comparison in the eyes of investors. Investors see the world in reverse now; emerging markets are growth oriented and promising profit while the developed economies are either stagnating or everyone is jumping ship from.
It’s not that the US, and their dollars, is no longer needed in the world economy, they are, but that emerging economies no longer are considered the only risky economies, or did we forget to mention Trump and Brexit? Because these two events had extreme effects on investor confidence in the two pillars of stability of the world economy. Basically, if these countries are no longer safe, then nowhere is safe, and the only thing that matters in an unsafe economic world is profit, something the emerging economies have over their developed counterparts considering they grow on an annual average of 6.8%, an average Egypt is expected to surpass.
World renown Egyptian economist Mohamed Omran thinks that 2017 will be the greatest year in two decades for Egypt’s stock and he’s not alone. When $10 trillion dollars’ worth of international investors were asked what economy in the Middle East was the surest bet, around 50% chose Egypt.
Invest! Invest! Invest!
If you are looking for some investment tips, all signs point to emerging markets right now. Particularly commodities which are expected to make a major come back after their stagnation under Obama, as Trump has removed a lot of regulations that suppressed commodity trade. Under Trump, the picture looks rosier for things like aluminium, copper, gold, and natural gas. If you are looking at Egypt, look to these industries, many of which are prospering; particularly natural gas. Gold is low now, particularly after the rate hike by the Fed, so buy while its cheap! Egypt is also set to unveil some IPOs which investors have been eying. Look to invest in Egypt financial, health care, energy, and petrol-chemical industries which everyone from JP Morgan to Moody’s Credit Agency expects to do well in 2017.
Finally, there is always a chance things can go south quickly, there are a lot of risks in emerging markets, but international investors see this as the age of the developing country. Invest now, rather than buying all the crap you normally get! In 10-15 years’ time, it’s the smart investor that's willing to take some risk at home that will see a true profit, as opposed to those continuing to put their faith in out-of-touch western-centric investments.