Egypt’s Crashing Pound Headaches
Egypt stocks were 35 percent in the red on the MSCI Index going into December, as a dollar shortage, lackluster parliamentary election turnout and plane crash killing all Russian tourists aboard took their toll on the 4th anniversary of the anti-Mubarak uprising. Standard &Poor’s downgraded the sovereign outlook to stable despite successful poll completion as it predicted 4 percent growth and a 10 percent fiscal deficit this year and medium term external financing needs at 100 percent of current account revenue and reserves. Hundreds of candidates from Mubarak’s former ruling NDP party were successful in races, but the outcome will not change cabinet composition, aside from the scheduled central bank head replacement, or economic policy as heavy domestic borrowing at $3 billion/week has sent public debt above 90 percent of GDP. Import-export cover is under one-third and FDI even with the new Zohr gas field find will be unable to bridge the balance of payments gap without further outside help from Gulf allies or a possible IMF standby agreement.
Foreign reserves have dwindled toward $15 billion and the pound has dropped over 10 percent against the dollar in the official market where banks and companies are subject to a web of access and trading restrictions against persistent IMF calls for more flexibility. The parallel exchange has drifted to 8.5/dollar as the central bank scrambles to inject hard currency to ease the crunch. It may also raise interest rates soon under the new governor, a longtime state bank executive, to counter double-digit inflation and the Fed’s inaugural hike. The fiscal stance must also harden after a first round of fuel subsidy removal, but VAT implementation has been delayed and security spending may increase after the alleged terrorist bombing of the Russian visitor airliner, which resulted in a Europe travel ban to the Sharm-el-Sheikh resort.
Saudi Arabia as a key backer has endured its own 10 percent MSCI loss and S&P one-notch downgrade, with global oil prices touching $30/barrel and creating a 10 percent of GDP fiscal deficit and international reserve drawdown to $650 billion. The stock market incremental foreign investor opening has been overshadowed by speculation over the future of the longstanding 3.75/dollar peg, which also came under scrutiny during the 2008 crisis after Dubai’s default. Forward options calculate minor weakness and CDS spreads have also risen marginally under the dual currency and credit pressures. Officials cut spending $80 billion and are studying energy subsidy reform as in the UAE, and have resumed domestic bond issuance and contemplate an external sovereign placement in 2016. Geopolitics also factored in the rating change with the cost of the anti-Houthi rebel campaign in Yemen, and participation in the anti-Isis airstrike coalition against strongholds in Iraq and Syria. Religious and strategic adversary Iran will also receive further sanctions relief in the coming months if international atomic inspectors sign off on dismantling efforts.
Libya also has a large Islamic extremist presence threatening neighbors as a Rome conference just produced a tentative unity government accord among belligerent post-Gaddafi factions. Tunisia after several tourist site attacks resulting in 20 percent MSCI share drop will erect a border fence until a government can restore order there. It also got additional World Bank and African Development Bank loans for job creation and bank rehabilitation, as a new foreign investment law moves through parliament to welcome such inflows.
