The economic recession in the Middle East and North Africa region has caused major fluctuations in the value of local currencies, in many regional countries, against the dollar, euro and other hard currencies, throughout the past couple of years. Despite monetary and fiscal measures taken by some countries to shore up the foreign exchange market, the turbulent economic and political environment failed to curb the volatility of foreign exchange markets.
The upheavals in local currency markets appear to have triggered two key monetary trends. First, individuals and investors hoarding hard currencies to protect themselves from the deterioration in the value of the local currency. The second trend entails speculation on local currencies for profit. Both trends have been key contributors to the growth of parallel black markets in several regional countries.
Economic vulnerability in various countries in the region, resulting from growing geo-political and economic turmoil, will likely ensure the steadiness of speculators’ activities. It will further lead to a shift to the “dollarization” of assets in countries such as Iran and Turkey. Meanwhile, positive developments in other countries, such as the recent lift of economic sanctions on Sudan and the correction approach for exchange rate implemented in Egypt, will partially contribute to regulating currency speculation in each of those countries.
However, it seems that restoring balance to exchange markets in the region is more difficult in light of growing uncertainty in the region, which could maintain high profits for speculators.
Tremendous profits:
The recent lack of confidence in regional economies, coinciding with a decline in foreign currency reserves has led to major upheavals in the exchange markets in countries such as Egypt, Sudan, Iran and Turkey. This has led to the expansion of black markets. In fact, over the past few years, various countries in the region have suffered from a growing foreign funding gap, which is expected to further widen in the coming years.
In such volatile context, individuals and firms tend to dollarize their assets; converting their savings from the local currency into dollars in order to safeguard the value of their assets from the devaluation. The value of most currencies have declined since the early months of 2016. Local currencies were subjected to widespread speculation by various sectors in the community, utilizing it as a source of profit. Together, such trends contributed to expansion of the black market.
As a result of the previously mentioned activities, the gap between the official and black market widened, reaching unprecedented levels in recent months, causing higher prices and shortages in commodities. In Sudan, the gap between the two markets was at its greatest in mid-2016 at 122per cent, while in Egypt, the gap reached to 100 per cent in October 2016.
Yet, the environment in war-torn countries is worse. In Libya, the value of the Libyan dinar against the dollar on the black market was four times equal its official value by the end of 2016. In other stable countries, such as Algeria, Morocco and Jordan, the foreign exchange market crisis was less severe since these governments succeeded in bridging the gap of foreign funding using their foreign reserves and a number of funding agreements. Accordingly, one can assure that as the foreign exchange market became more volatile in some countries, speculators made higher profits.
Powers of influence:
There have been both positive and negative occurrences in the region that would affect the state of foreign exchange markets in the short run. The negative ones include the following:
1- Growing geopolitical risks: Escalating security tension in war-torn countries is a key reason for the retreating confidence in regional economies. Terrorist attacks in Turkey, in early 2016, and the political turmoil following the failed coup attempt in the summer of 2016, have put ongoing pressure on the Turkish lira. Since the beginning of 2017, the value of the lira has officially dropped against the dollar by more than ten per cent, reaching a value of TRY 3.81 per USD.
For other geopolitical reasons, the Iranian rial depreciated to reach the lowest rate against the dollar on the black market, reaching 41,300 rials per dollar on December 25, 2016. This was a further decline from the previous exchange rate of 34,600 rials to one dollar, which widened the gap between the black market’s rates and the official price with more than 32,000 rials.
One of the key reasons for this backdrop is growing concerns among companies to invest in Iran after the threats of the new US administration. The newly elected President, Donald Trump, has called for renegotiating the concluded nuclear deal between Iran and the 5+1 group in July 2015.
2- The strength of the US dollar: The US dollar continues to rise against major hard currencies after the US Federal Reserve raised interest by one quarter of a per cent, from 0.50 per cent to 0.75 per cent on December. 14, 2016. The euro is expected to be equivalent in value to the dollar by the third quarter of 2017, according to Barclays Bank.
The rising value of the US dollar also caused local currencies to decline in emerging markets, including the Turkish lira. According to the International Monetary Fund (IMF), the high interest rate on the US dollar caused a flood of investments from emerging markets to benefit from those interest rates.
Positive developments include:
1- Lifting of sanctions: Lifting the sanctions on several regional countries, such as Iran and Sudan, will contribute to reviving their sources of foreign currency. It is expected that both countries’ economies will be gradually reintegrated into the global economic system. On January 13, 2017, the former administration of US President Barack Obama announced lifting economic sanctions off Sudan, which will allow Sudanese banks to deal and trade extensively with global banks, especially American ones.
This decision should alleviate pressure off the foreign exchange market in Sudan, and temporarily stabilize the value of the Sudanese pound against hard currencies. To date, the value of the dollar has decline in the black market from an average of 19 Sudanese pounds to 17 pounds.
2- Monetary reform: Some regional countries are reviewing their fixed exchange rates in an attempt to avoid further depletion of their foreign reserves, and unify the exchange market. Egypt was one of the countries that initially took this approach in the region, when on November 3, 2016, the Central Bank of Egypt announced floating the Egyptian pound.
This step coincided with governmental pressure to limit imports, to help reduce currency exchange on the black market.
Additionally, at the end of December 2016, two months after the floatation of the Egyptian pound, banks were able to gather a cache of USD 6.9 billion, according to Central Bank Governor, Tarek Amer.
3- Receiving foreign loans: Regional countries made bilateral and multilateral foreign funding agreements, which were utilized to close the gap in foreign currency reserves. Sudan received a USD 500 million deposit from the UAE as a form of bilateral deal. Furthermore, in July 2016, Iraq signed a $5.4 billion deal to support economic stability and replace shortages in oil revenues.
Meanwhile, Egypt and Jordan signed Extended Fund Facility agreements worth of USD 12 billion and USD 723 million, respectively. These funding agreements are conditioned by carrying out economic reforms in cooperation with the IMF, an essential step to gradually restore confidence in the markets of these countries.
Possible scenarios:
Based on the previously mentioned developments, it is likely that the hubs for speculators on foreign exchange markets in the Middle East will noticeably change to be manifested in one of the following two scenarios. First, a temporary retreat in speculation on local currencies or in dollarization in countries such as Egypt and Sudan, in the light of economic and political progress, while carrying out economic reform programs. However, the permanent restoration of balance in the market will depend on sustainable economic and political stability.
Second, speculators’ profits will continue to increase in the coming months in countries such as Turkey and Iran due to predictable economic and political pressures. This will increase the volume of currency speculation within the black market, which could force Iran to float its currency against the dollar in the future, as Egypt did, in order to unify the foreign exchange market.
In conclusion, speculators in local currencies were the sole beneficiaries from recent upheavals in the foreign exchange market in the region. The only way to reduce their profits on the short run will depend on restoring the balance of the foreign exchange market, which is closely linked to regional countries overcoming their successive economic and political crises.
