Egypt’s Beguiling Brotherhood Feelings

Muslim Brotherhood candidate Morsi won a narrow presidential election victory over former regime stalwart Shafiq a week after the military annulled parliament in a continuing power struggle as equities seesawed while maintaining their MSCI core universe lead. Tahrir Square again erupted in cheers and Freedom and Justice party advisers expressed confidence IMF negotiations for a $3 billion loan to replenish reserves would soon resume, but the EU, World Bank and EBRD were forced to suspend assistance mainly for infrastructure projects pending clarification of the government apparatus and composition. The blow coincided with another ratings outlook downgrade for the sovereign and banks, as S&P estimated a 50 percent chance of deterioration over the coming quarter with political instability harming credit fundamentals. The 40 percent state-run banking sector is “fragmented” with high tourism, real estate and Treasury bond exposure, and rewriting the constitution could introduce further “distortionary” mandates, the agency found. $2 billion in capital account inflows have come from the Saudis and Islamic Development Bank, but foreign portfolio appetite remains depressed despite single-digit stock p/e ratios and double-digit fixed-income yields. A takeover of Mobilnil telecom holdings brought a rare cross-border deal as the chaotic and extended post-Mubarak transition dictates a wait-and-see stance. Investors are skeptical that even with a coherent official lineup subsidy reform can quickly curb the fiscal deficit as domestic debt approaches 80 percent of GDP, and that a massive devaluation as indicated by the 30 percent lower NDF reading can be averted with the 60 percent reserve loss the past 18 months. The current account remains in slight deficit despite solid Suez Canal earnings and remittances, and continued company and privatization investigations have claimed prominent businesses such as regional broker EFG-Hermes which was sold to Qatari interests. Top Egyptian executives like Orascom’s Sawiris have turned their attention abroad, especially to picking up cheap European assets rather than handling new complexities at home. A $1 billion local currency Euroclearable instrument is due in July as its illiquid distressed return spiked to 40 percent in the hands of hedge fund speculators. In FDI big energy and utility contacts remain in limbo, including a $10 billion BP oil and gas venture.

Arab Spring originator Tunisia has been downgraded as well as this year’s gross external financing needs will exceed balance of payments proceeds and available reserves. Banks continue to be hammered by “widespread” loan principal and interest restructurings, and uncertainty surrounds the 2013 scheduled elections although they should occur “without major political conflict.” However a curfew was re-imposed in the capital after unemployed ultra-religious Salafists rioted following a court ruling against former strongman Ben Ali, and the interim Islamic administration removed technocrat central bank governor Nabli for too-tight fiscal and monetary policies which suggested a zero score for the Nada party’s populist campaign promises.