All eyes on Cairo as IMF comes to town

With few local events to guide markets in the week ahead and exchanges closed until the end of Eid Al Fitr, investors will have to look overseas.

Egypt's economic troubles have worsened since the revolution that overthrew Hosni Mubarak in February last year. Cairo is in talks with the IMF for some much-needed funds. Amr Nabil / AP Photo
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Investors in the Arabian Gulf still glued to their BlackBerry screens during Eid Al Fitr will have to look overseas for clues to the events that will move markets when local exchanges reopen for trading on Wednesday.

Key will be the resolution of economic troubles in Egypt that have put a discount on Cairo's market since the country's uprising began last year.

Christine Lagarde arrives in the Egyptian capital on Wednesday at the head of a long-anticipated IMF mission to the Arab world's most populous nation.

Egypt will discuss increasing the sum borrowed from the IMF to US$4.8 billion (Dh17.63bn), up from a previous requirement of $3.2bn.

The talks come on the heels of a pledge by Qatar to deposit $2bn in Egypt's central bank. Cairo has also requested a $500 million grant from the United States.

Egyptian foreign reserves slumped to $14.4bn at the end of last month, a drop of 7.1 per cent compared with the previous month, having fallen by more than half since the revolution that ousted Hosni Mubarak from the presidency in February last year.

The current reserves are enough to cover just over two months of imports, according to analysts at Bank of America Merrill Lynch.

If planned support for Egypt materialises, the need for a devaluation of the Egyptian pound may be narrowly averted.

"Potential bilateral and multilateral aid pledges to Egypt are broadly adequate to bridge our revised projected external funding gap and minimise the need for FX [foreign-exchange] adjustment, in our view," the bank report said.

However, it added that Egypt's rapidly dwindling foreign reserves were reaching breaking point as the country had now sold off most of its liquid reserves.

"While recent Qatari aid supports the Egyptian pound [in the] near term, the timing of further support is crucial to avoid a squeeze on FX [foreign exchange] reserves by year-end," the report added.

"The potential increase in the IMF loan size and forthcoming visit of… [Ms] Lagarde signals strong shareholder support as well as a potential commitment to finalise the loan near-term despite political volatility."

The EGX 30 index of Egyptian stock rose 4 per cent last week, following the president Mohammed Morsi's dismissal of two senior military leaders. Fitch Ratings said the move could bring about a more "sustainable" relationship between the country's military and civilian powers.

Meanwhile, the euro-zone debt crisis will loom again as fears grow Germany, the locomotive of European growth, is running out of steam. Data released last week pointed to expansion of the German economy of 0.3 per cent - enough to ensure the euro-zone economy also grew during the second quarter by 0.2 per cent, while France flatlined and all the other big European powers contracted.

"The euro zone's largest economies are bearing the slump in demand from their major trading partners elsewhere in the euro zone relatively well" as the value of the euro falls, according to a report from Capital Economics.

"But this is unlikely to be enough to prevent sharp falls in exports. In the past, global demand has been a far more important determinant of export growth than the exchange rate."

With growth cooling in the US and China, Capital expects both France and Germany will slip into recession next year. Publication of purchasing managers' index figures for the euro zone this week, a key barometer of industrial health, ought to clarify the situation for economists.

Oil prices are expected to remain clearly within investors' sights during the week ahead, having surged last week as geopolitical tension surrounding Iran heightened.

Brent crude futures briefly rose to as much as $117.53 per barrel last week, the highest in three months.

With the US election only three months away, political pressures on the world's largest economy to release emergency reserves may be exaggerated.

The administration of president Barack Obama regards a release from the Strategic Petroleum Reserve as "an option that is on the table" if prices rise or supply is disrupted, Josh Earnest, a White House spokesman, said in Washington.

He declined to say whether a release was being actively discussed.

During the 2008 presidential race, when oil prices topped out at $145.86 per barrel, Mr Obama, then a candidate, dismissed calls to dip into strategic reserves.

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