Markets in the Middle East and Central Asia may have more to lose from a shift in global risk sentiment than other developing nations, according to an International Monetary Fund report highlighting the region’s increased reliance on hot money.
Capital inflows into the region have almost doubled over the last decade, as governments grappling with low oil prices rushed to bond markets to finance their budget and current-account deficits. Long-term foreign direct investment, on the other hand, has dropped almost by half.
While the funds provided some governments the means to plug deficits relatively cheaply, “lower government and corporate transparency” make them twice as sensitive to changes in risk appetite than inflows into other emerging markets, the IMF said.
“The global outlook is that of lower growth and rising uncertainty, including due to unresolved trade tensions,” the IMF said in the report released in Dubai on Monday.
“Since inflows to the region are highly sensitive to changes in global uncertainty, there are risks of capital inflows falling or even reversing.”
The findings heighten the need to shield the region from a global sell-off. The Washington-based lender said efforts should focus on repairing public finances and bolstering FDI, whose drop has been more pronounced in the Middle East and Central Asia than the rest of the world because of weak growth prospects and political tensions, Bloomberg reported.
Capital inflows into the Middle East and Central Asia account for 20% of the total for emerging markets, up from 5% before the global financial crisis, according to the IMF.
One of the report’s recommendations is to develop local financial markets, which differ vastly across the region. In spite of being among the developing world’s most prolific international borrowers since the collapse in oil prices, domestic bond markets in the Gulf are underdeveloped.