02 March, 2016

At the frontier

With global markets taking a battering, how have the frontier markets in the region fared?

02 March 2016
With global markets taking a battering, Mena Fund Manager takes a look at how the frontier markets in the region have fared.
Despite recent attempts to diversify economies, the onset of lower oil prices has had a deep impact on the emerging market economies of the GCC. Saudi Arabia, the UAE and Qatar all suffered in 2015, making double-digit losses as the impact of lower oil revenues became clear.

The Mena region's other largest economies and energy importers, Turkey and Egypt, also fared badly in 2015 as investors withdrew money from emerging markets fearing a slowdown in the region. However, while the larger, emerging economies of the region stumbled, the frontier markets - as defined by index provider MSCI - showed a more mixed performance.

Import and export

Of the frontier market economies in the region, oil producers fared the worst. The GCC's Bahrain, Kuwait and Oman saw market falls during 2015.

As with the larger economies, the drop off in oil revenues has placed greater pressure on public finances and prompted some belt-tightening by authorities in the region.

Low oil prices have a greater impact on countries such as Oman and Bahrain with higher breakeven prices, while Kuwait derives almost half of its GDP from some of the world's largest reserves.

With many having claimed the bottom of the market for oil prices and louder calls for OPEC to back a cut in production levels, markets should return to growth if prices begin to rise.

Meanwhile, the energy importing frontier markets of the Levant - Jordan and Lebanon - were the region's best performers. Lower oil prices have benefited both countries, although economic growth remains under pressure from lower growth affecting the entire region.

Both countries also face the ongoing economic challenges posed by the influx of millions of Syrian refugees, although international efforts to provide aid and to host countries have been ramped up more recently.

Lebanon recently reported improved PMI figures from Beirut-based BLOM Bank suggested that, although demand for products and services had continued to contract in January, the rate had at least slowed.

Yet, not all energy importers performed strongly. Morocco saw a fall in stock market performance during 2015. Formerly classified as an emerging market, Morocco has suffered in the past as the manufacturing economy dealt with low demand from key European markets. The prospects for the economy still remain positive.

"A drought is likely to weigh heavily on Morocco's agricultural sector this year and headline GDP growth looks set to slow to around 2.5%, down from more than 4% in 2015," noted Jason Tuvey, Middle East economist at Londonbased consultancy Capital Economics.

"Nonetheless, with twin budget and current account deficits narrowing sharply and the economy continuing to establish itself in European manufacturing supply chains, we remain optimistic about the country's mediumterm prospects."

Outlook

While emerging markets have suffered from capital outflows and a downturn in performance, frontier markets have performed slightly better. The S&P Frontier BMI index contracted by 2.0% compared with a fall of 3.0% for the emerging markets index during 2015.

The region's frontier markets are likely to face challenges to growth and stock market performance. The ongoing low oil price environment, global growth slowdown and regional conflicts are set to have a significant impact on frontier markets in the shortterm. Whether markets grow in 2016 will depend on how they overcome the many challenges affecting the region.

© MENA Fund Manager 2016

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