Egypt’s Deauville Declaration Muttering

Egyptian stocks budged from their rear MSCI roster position as international and Arab official lenders reaffirmed a previous commitment in Deauville, France for $30-40 billion in near-term aid for MENA political and economic transition, and formally recognized the Libyan interim authority which just before held its own reconstruction meeting. Cairo’s army-controlled government, which has faced renewed street protests as it prepares to stage parliamentary and presidential elections, originally spurned IMF budget and balance of payments funding with minimal conditionality for Gulf cash but has received only $500 million, according to officials, as domestic debt yields have touched the sensitive 13 percent mark in several failed auctions. GDP will contract at least 3 percent this fiscal year and unemployment is at a 5-year high although the tourism slump was only 30 percent in the latest month.  Investment was down 25 percent in the most recent quarter, despite a decision by Scandinavia’s Electrolux to carry through with a Mubarak-era deal to acquire a stake in a big listed group. Local retail investors are the dominant bourse presence with lackluster company earnings and thin trading, with circuit breakers prevailing on periodic 10 percent daily declines. Big foreign holdings of both debt and equity have reversed to paltry amounts amid concerns about private sector direction and former regime ally investigations, and a budget deficit due to top 10 percent of GDP on the heavy social subsidy burden and a civil service salary hike. Double-digit inflation has eased with commodity retrenchment, and the current account will again be in shortfall despite foreign reserve depletion having stabilized at $500 million monthly. Banks are the main Treasury-bill buyers and the system has been under negative credit rating review notwithstanding a cautious 50 percent loan-deposit ratio.  At the Deauville gathering in May the G-8 pledged $20 billion roughly equaling Arab lines, including $3 billion in Saudi ones which have only partially materialized.

Tunisia, where the stock market is also off  has gotten World Bank and EU money, but a $25 billion 5-year plan presented by the Finance Minister, a former Citigroup executive, for infrastructure and job creation was not specifically endorsed. Elections have been delayed with the previously-banned Islamic party ahead in opinion polls, and GDP growth will be barely positive this year. With the troubled Eurozone as its chief trading partner, the current account gap will reach 5 percent of output even with the gradual return of remittances and visits from Libya. External debt is primarily on concessional terms, but additional Eurobond redemption comes in 2012, and the sovereign rating was downgraded in July with a negative outlook on a “cloud of uncertainties” which may also derive from summit puffery.

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