In Emerging Markets (EM), data releases confirmed the positive effects of lower oil prices on inflation and trade balances in a number of countries. However the rapid rise in the US dollar is generating some anxiety in a number of countries — such as Mexico or Turkey for instance — where monetary policy objectives are pivoting from growth to financial stability. The week also brought some interesting insights about the policy intentions of Chinese policy makers, who are grappling with the opposite challenges of having a currency attached to the strong US dollar.

Egypt: Egypt is open for business. This was the message portrayed during the Egyptian Economic

Development Conference held on March 13-15. International investors have heeded Egypt’s call and signed investment deals worth $138 billion. The Gulf Arab states — UAE, Kuwait and Saudi Arabia — pledged another $12 billion in investments, central bank deposits and "development aid".

For Egypt the money pledged is validation of its economic and strategic importance. For the Gulf states, an Egypt under President Abdel Fattah El-Sissi represents the road to stability and provides a bulwark against the Muslim Brotherhood. The international investment pledges and agreements validate Egypt’s return to doing business after three very challenging years of low growth, higher unemployment and lower FDI. The government unveiled several investment-friendly measures including cutting income tax and new mechanisms to resolve commercial disputes.

Why is all this important? Egypt’s stability is important for stability in the Middle East as the IS threat is fought throughout the region.

Without Egypt’s return to more normalized economics, its political stability and that of President El-Sissi would be fragile. It is widely believed that Egypt is the last frontier. Egypt’s future could have significant implications for the future of the Arab world as Syria, Iraq, Libya and Yemen are embattled with internal wars and instability.

Finally, our review of emerging markets developments would not be complete without two posts about recent developments in Argentina and Ukraine, where bond prices have been volatile over the week.

In many countries the move lower in FX rates has been justified by the opportunity, on the part of policy makers, to take advantage of the global disinflation context to let their currencies adjust without excessive risk of pass-through into inflation numbers (e.g. Indonesia, Turkey). Sometimes, lower inflation was simply the result of weak growth, which made real yields too high and demanded a policy response (e.g. Thailand, Korea). Generally speaking, a more "pro-growth" stance has underpinned many rate cuts by EM central banks since last summer and is the mirror image of all the tightening delivered in the aftermath of the "taper tantrum" in late 2013.

Among the large EM economies, since the Philippines central bank rate hike last September, only the central bank of Brazil has hiked its policy rate.

China stands out among the countries leaning toward easing policy. Its options are more limited, because of its managed exchange rate; but the impact of its decisions is more important, because of the size of its balance of payments. China has many strengths, but rapid US dollar appreciation presents two macro challenges: First, because of its managed peg, its currency has been appreciating rapidly against the currencies of all its trading partners save the US and the Gulf, making its exports less competitive. The large trade surplus suggests it is manageable, and China has been preparing for this possibility for a long time by upgrading its supply chain and reforming domestic markets. Secondly, in response to the domestic economic slowdown, Chinese households and companies have been pouring money into foreign assets and created pressure on domestic liquidity. Speculation about a possible devaluation is increasing the pressure further.

Owing to the authorities’ strong preference for financial stability, a devaluation is unlikely. It is good news considering the sort of "race to the bottom" that competitive devaluations may foster. A devaluation is probably not desirable either, in our view, as the problem is not so much with the external accounts as with the domestic balance. As money flowed into China over the last decade, the country accumulated excessive FX reserves and increased its reserve requirement ratio (RRR) in order to control local liquidity. As money starts flowing out, this process will be reversed, with reserves coming down to more palatable levels and the RRR being cut to compensate for the liquidity contraction. The preferred policy option will thus be further monetary policy easing and financial markets reform: This week, credit data for February showed the positive results of recent interest rate and RRR cuts. In addition PBOC Gov. Zhou said that deposit insurance will very likely be launched during the first half of this year, and the probability of removing the deposit rate ceiling this year is very high.

— John Sfakianakis is Middle East Director at Ashmore Group.