IMF loan could be back on the table for Egypt

Investors say GCC funding is only a stopgap measure.

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Egypt’s on-off talks with the IMF may be back on again, as investors say IMF loans offer a stronger platform for reviving the economy than the Arabian Gulf money keeping it afloat.

Even with signs of a recovery in tourism and investment, the gap between Egypt’s foreign currency receipts and needs may reach US$15 billion a year by 2017, said Jason Tuvey, a London-based analyst at Capital Economics. Support from GCC countries is “keeping strains in its balance of payments contained”, but it’s “not a long-term solution”, he said.

In the political upheaval that followed the revolt of 2011 and the army takeover two years later, as investors fled and currency reserves plunged, Egypt turned to the GCC. First Qatar and later Saudi Arabia and the UAE obliged, with more than $40bn in grants, loans and investment to prop up sympathetic governments. Meanwhile, repeated talks with the IMF broke off short of a loan accord.

The government, headed by the former general Abdel Fattah El Sisi, has not ruled out a loan from the IMF, although the deputy finance minister, Ayman El Kaffas, denied a report in El Watan newspaper last week that a $6bn deal would be discussed with IMF officials in Cairo next month. The government also plans a eurobond sale, Egypt's first since 2010.

For bond investors, “IMF funding is seen as superior,” said Sergey Dergachev, a senior money manager at Union Investment Privatfonds in Frankfurt. It means “some sort of fiscal discipline, prudent debt management policies”.

Mr El Sisi is already enacting some policies the IMF typically requires as conditions for loans. Egypt slashed fuel subsidies last year and aims to cut its budget deficit by at least 1.5 percentage points to 10.5 per cent of economic output this year.

The fund would be likely to require faster action on that and other issues, and that would be a good thing, according to Lutz Roehmeyer, the director of fund management at Landesbank Berlin Investment.

“Investors so far have the impression that politics and reforms are moving too slowly in Egypt,” he said. “An IMF programme would increase certainty that there will be a reform agenda.”

The IMF this week criticised Egypt’s decision to delay imposing a capital gains tax on stock investors. Chris Jarvis, head of the fund’s Egypt mission, also said the government had not requested IMF financing.

Bolstered by the GCC handouts, Mr El Sisi’s government has steadied the economy and spurred a market rally.

GDP is expected to grow by at least 4 per cent this fiscal year, its best performance since the 2011 uprising. The benchmark stock index is up more than 80 per cent since the army takeover in July 2013, while the yield on Egypt’s dollar bonds maturing in 2020 has plunged close to 4 per cent from almost 11 per cent.

Egypt sought to market its fledgling recovery at an investor conference in March, where the government says it got pledges worth $36bn. Most of them came from the GCC, including a $6bn deposit in the central bank that helped to replenish international reserves.

That cash may not last long, though. Egypt has $4.45bn in foreign currency commitments this year, according to the Cairo-based investment bank EFG Hermes. Those include repaying $1bn to Qatar, which has fallen out with Egypt since the army takeover, and $700 million to Paris Club debtors. The government also owes money to international oil companies.

From the government’s point of view, there are drawbacks to IMF funding, according to Mr Tuvey. “Egyptian authorities would prefer not to be tied down by an IMF financing package and instead undertake economic reforms at its own pace and rely on financing from the Gulf as a backstop,” he said.

Egypt is not seeking an IMF loan because the pace of required reforms may not be compatible with social conditions in the country, the state-run news agency quoted the international cooperation minister Naglaa El Ahwany as saying on Wednesday.

Many economists, though, believe that the squeeze on Egypt’s finances will force the government to overcome any such scruples.

“Sooner or later, we will have to resort to the IMF,” said Omar El Shenety, the managing director at the Cairo-based investment bank Multiples Group. “For credibility first, before its money.”

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