Egypt's fast use of cash loan set to hit shares

Markets Update: Egyptian equities are expected to come into sharp focus today after it emerged that a US$2 billion cash injection from Qatar has already been used up.

A street vendor displays price tags for fruits in Cairo. The Egyptian pound slipped further against the dollar during the past two weeks. Nasser Nasser / AP Photo

Egyptian equities are expected to come into sharp focus today after it emerged that a US$2 billion cash injection from Qatar has already been used up, which analysts said pointed to significant pressure on the Egyptian pound last month.

As markets closed on Thursday, Reuters reported that a $2bn loan from Qatar had arrived at the Egyptian central bank in December. Qatar has also promised a $500 million grant.

Egypt's foreign currency reserves were steady at a shade over $15bn during the month, as protests raged against the president Mohammed Morsi and investors took flight. The remaining reserves are barely enough to cover three months of imports.

Analysts believe that the absence of any change in reserves means that Qatar's cash infusion has already been spent propping up the pound.

Egyptians are switching their savings from pounds into dollars to protect against currency depreciation, further drawing down the central bank's foreign currency reserves, said Jean-Michel Saliba, an economist at Bank of America Merrill Lynch.

The pound has depreciated 5.7 per cent against the dollar during the past two weeks.

The vanishing Qatari deposit pointed towards "significant dollarisation pressures, similar to the revolution's peak, and to the possibility of significant weakening in the Egyptian pound unless an IMF deal is finalised shortly".

The total at the end of December "leaves just $500m in extra Qatari deposits to be transferred from January onwards and severely constrains the breathing space to the central bank of Egypt if an IMF loan is delayed much further", said Mr Saliba.

The EGX 30 Index of Egyptian equities fell 1.9 per cent on Thursday, sapped by uncertainty over the central bank's currency auctions, which have attempted a managed devaluation of the pound.

The gloom in Cairo was in contrast to markets in the Arabian Gulf last week, which capped another strong week with further gains on the back of improved Chinese export data and a return of liquidity to local markets.

The Dubai Financial Market General Index rose 4.4 per cent to reach 1,756.22, its highest level in more than two years following the fourth consecutive week of gains.

The Abu Dhabi Securities Exchange General Index rose 1.5 per cent, also marking a fourth straight week of gains. Volumes on both emirates' exchanges have rallied substantially since the start of the year as global investors ploughed funds into global equities.

Buying activity should continue on local exchanges during the next few weeks as investors hunt for dividends as earnings season begins, said Marwan Shurrab, the assistant fund manager and chief trader at Gulfmena Alternative Investments.

However, the substantial boost to market liquidity was likely to put wind into local markets' sails in the short term, he added.

"For the time being, I'd expect this driver or main catalyst to stay stable going into Q4 numbers announcements and dividend announcements," he said.

Qatar National Bank is expected to report earnings this week, while Saudi Arabia's earnings season is set to continue, with high expectations for the kingdom's banking sector.

In the meantime, global sentiment has improved markedly.

A successful Spanish bond auction provided some lift to international markets on Thursday, after yields on Spain's two-year government bonds fell to 2.1 per cent compared to highs of 6.6 per cent in July last year, when the country's creditworthiness was under threat from markets.

Both the European Central Bank and the Bank of England kept rates on hold at their monthly policy meetings on Thursday.

The MSCI World Index has risen 3.2 per cent so far this year, after the United States Congress reached a deal to avert the package of tax rises and spending cuts known as the "fiscal cliff".

Although further congressional battles are expected to follow, particularly a rerun of the debate over raising the US debt ceiling expected during the next two months, recent rallies could yet have further to travel, analysts from Goldman Sachs wrote in a research report.

"The current combination of outlook and pricing continues to support a positive strategic stance. The market is not yet pricing our medium-term view of either the US or global growth picture into cyclical assets," said the report.

"The key timing challenge remains the 'hump' of weaker growth in 2013H1 [the first half of the year], in the US in particular. If the market can get comfortable looking beyond that - and the debt ceiling debate - then the recent rally may extend even in the near term."