Egypt’s moves this month to float its currency, reduce subsidies and seal a US$12 billion aid package from the IMF may trigger an inflow of international investments and help the country reverse the most severe economic crisis it has experienced in over a decade.
As part of the agreement closed with the IMF executive board on Friday, the Arab world’s most populous nation will get an immediate payment of $2.75bn and the remainder of the loan over the next three years to help support the government’s economic reform programme. The deal comes after many false starts over the past five years in concluding an agreement with the IMF.
“For many investors, the IMF agreement is the green light for investors because for many of them it was ‘I won’t believe it until I see it,’” said Simon Kitchen, a strategist at the Egyptian investment bank EFG Hermes. “Egypt has signed preliminary agreements with the IMF in the past five years, staff level agreements, but this is the only one that has been sealed.”
Mr Kitchen said, however, that there were many challenges still facing the Egyptian government, such as resisting the inevitable calls for higher wages from civil servants.
Increasing uncertainty for the global economy after Britain voted to leave the European Union in June and US voters this month elected Donald Trump – who campaigned on an anti-free trade and immigration platform – may also dent some appetite for investing in Egypt. But overall, he said, there should be a number of investors who will put money into the country, especially in Treasury bills and bonds that now offer attractive yields and publicly traded companies that are cheap after the devaluation.
Other analysts were also positive on Egypt. S&P Global Ratings on Friday upgraded its outlook on Egypt to stable from negative while maintaining its B-/B long and short-term sovereign credit ratings owing to recent moves the government has made to get the economy back on its feet and the backing from the IMF.
Christine Lagarde, the managing director of the IMF, said last week she would recommend that its board approve the $12bn loan to Egypt after the North African country floated its currency and reduced subsidies for fuel. Egypt has been in the grips of an economic crisis that has largely manifested itself in a shortage of much-needed hard currency that the import-dependent nation requires to feed its people and keep its factories ticking.
The central bank devalued the pound by almost a third to 13 pounds against the US dollar from a previously fixed rate of 8.85 to the pound on November 3. The bank said the starting exchange rate would “serve as soft guidance to jump-start the market”. Before that move, the dollar cost up to 18 pounds on the black market and currently its price in official channels is near that.
At the same time, the central bank also raised its key interest rates by 300 basis points and said that it would also stop trying to control what can be imported. The following day the government announced a reduction in fuel subsidies, bringing it closer to meeting demands made by the IMF for the loan. In August, Egypt’s parliament also approved a 13 per cent value-added tax, as had been recommended by the fund.
The IMF had also asked Egypt to raise an additional $6bn in financing, mostly from allies in the Arabian Gulf, before it starts disbursing the loan.
Before the move to remove the peg on the pound, Egypt had resisted letting its currency freely float and had instead made piecemeal devaluations since the uprising that removed the former president Hosni Mubarak in February 2011. The cost of defending the Egyptian pound, mostly with billions of dollars of aid from Gulf allies, has been high, however.
A key measure of non-oil private sector business activity in Egypt, sponsored by the Dubai-based bank Emirates NBD, fell to a 39-month low in October, weighed down by the difficulty companies have had sourcing dollars.
That may soon change, however, as the money starts flowing in.
“The IMF loan approval is a confirmation that Egypt is implementing the right reforms and is no doubt a strong signal that Egypt’s economy might be hitting the long-awaited inflection point many investors, including ourselves, were hoping it will,” said Mohamed Jamal, managing director of capital markets at Abu Dhabi investment company Waha Capital, who oversees more than $300 million in mostly Middle East and North African stocks and bonds.
“There are still risks ahead in terms of pick-up in inflation, social acceptance of these reforms, delivery on the fiscal tightening linked to the IMF programme. However, the outlook on Egypt is probably the best it has been since the Arab Spring.”
mkassem@thenational.ae
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