Egypt’s Modest Morsi Mission Mobilization

In an early gesture to reassert civilian supremacy over the military welcomed by investors with good bond auction and stock market results, new Muslim Brotherhood president Morsi demoted the long-serving Defense Minister and army chief of staff to advisers,  after keeping technocrats tapped by the previous regime in key economic posts. Prime Minister Qandil is a water expert with an extensive record working with development lenders whose assistance is vital to modernization and domestic and external deficit financing. His team has resumed contact with the IMF on a $3 billion-plus initial loan and received installments of long-promised multi-billion dollar inflows from Saudi Arabia and Qatar after foreign reserves halved to under $15 billion over the post-Mubarak period through July. According to Fund statistics, only half that sum is in actual hard currency with the remainder in gold and securities. The central bank replied that the latest monthly outflow will stabilize after Eurobond and Paris Club debt repayments, as official aid and selective cross-border business deals like a Mobinil recent share sale pick up. The pound has fallen less than 5 percent against the dollar the past year and a half and authorities may relent in allowing greater depreciation to further replenish reserves which must also cover $4 billion in dollar-denominated Treasury bill commitments due in coming months for the 10 percent of GDP budget hole. One-quarter of state spending will go to interest payments under the draft blueprint, and the monetary authority has quadrupled its claims on the government as commercial banks hesitate to raise exposure at 15 percent yields after ratings agency institution and industry downgrades. Moody’s predicts an NPL load toward 20 percent of portfolios by end-2013 as another asset side hit while foreign parents such as France’s Societe Generale may also withdraw local lines.

Inflation had been a rare positive sign in dipping to single-digits, but wheat import prices may again skyrocket with bad crops in the US, Russia and Australia from extreme weather. Subsidy allocations have already doubled absent a repeat of Moscow’s ban as in the 2010 drought. GDP growth will be a sluggish 1-2 percent this calendar year, with the tourism minister expecting only slight improvement and Suez Canal revenue up less than 5 percent on flat global trade. GCC remittances are steady even if members have yet to fully meet funding and project pledges, including for energy development. Shortages persist with the Sinai gas pipeline regularly interrupted by maintenance and attacks which have added to the region’s security hot spots. President Morsi promised to crack down on militants operating in the area after they killed a dozen border guards. Islamic finance may test another boundary as the professional association now projects 10 percent annual growth under the new leadership tendency from about 5 percent of prior total activity.