Egypt’s Debatable Post-Depreciation Direction

Egyptian stocks retraced their 40 percent YTD gain as the two main presidential candidates held a televised debate, the Saudis came through with a $1 billion loan as IMF talks progressed on a facility triple that sum, and monthly reserve depletion was interrupted after an extended string halving the cushion although pound forwards still assume a 20 percent devaluation. The Fund team has reiterated the need for broad-based political and technical support for a program expected to tackle the sensitive issues of currency regime and social subsidies, the latter already left untouched after the parliament rejected military-appointed cabinet planned spending cuts to reverse the 10 percent of GDP budget deficit. Borrowing costs have become prohibitive at 15 percent for 6-month paper, and auctions regularly fail as banks demur with assets concentrated 40 percent in Treasuries against NPLs at one-tenth of portfolios. On the external side erratic Suez Canal receipts and slumping tourism will send the current account hole to 2.5 percent of GDP as FDI stays away pending the outcome of investigations into previous dealings which have brought re-nationalizations and criminal charges. In the financial sector Italy’s Intesa Sanpaolo is under fire for allegedly taking a stake in Bank of Alexandria on preferential terms. With many listed companies closely associated with the Mubarak tenure, foreign investors have refused to chase the rally with fund data tracker EPFR reporting negligible allocation. They also cite diplomatic squabbling with longtime peace partner Israel, as a gas pipeline agreement was suspended over attacks and payment claims. The tension has contributed to uneven sentiment in Tel Aviv, with the exchange advance one-fifth of Cairo’s. The Netanyahu coalition briefly fractured over confrontation with Iran and early elections were set before centrist party Kadima joined the alignment. With the renewed mandate the government is due to press its economic “deconcentration” agenda following popular protest and special committee recommendations that family-owned conglomerates divest non-core holdings to ensure greater competition and affordable financial services access.

However the push coincides with tighter prudential standards on mortgage lending urged by the IMF during a recent stress-test exercise. Consumption is also dampened by unemployment recalculated at 7 percent under revised methodology and a shakier shekel against the dollar with the central bank benchmark rate kept at 2.5 percent. Foreign investors have exited local government bonds on the yield and currency calculus and imposition of withholding tax, as banks have parked additional funds after cutting global exposure including to Europe’s PIIGS where they retrenched 15 percent. Athens after national elections failed in initial efforts to construct its own unity formation as non-traditional parties won favor with cross-border private bond links an ancient sacrament.