Egypt’s Pound Sense Posturing

Egypt shares erased their double-digit MSCI loss into March as the central bank injected $1.5 billion into the dollar-short foreign exchange market, where the parallel rate was at a 25 percent premium, and devalued the official level by half the difference while signaling “more flexibility.” It raised interest rates 150 basis points in turn, as VAT introduction and further fuel subsidy cuts could again tip inflation into double digits. Sovereign external bond prices also jumped, with the benchmark yield down 50 basis points to 7.5 percent, and foreign investors may reconsider domestic government Treasuries where holdings were a meager $50 million in 2015. State banks offered dollar-denominated certificates of deposit with 15 percent returns in a further effort to choke black market demand, despite the precarious international reserve position at $ 16 billion, just three months imports. The current account deficit will again be 3 percent of GDP this fiscal year as tourism and Suez Canal earnings continue to drop and the $3 billion needed to bridge the gap is unlikely to come from FDI or Gulf allies in their own oil slump. The government may begin talks on an IMF program at the April meeting after months of denial. The Fund has long called for pound peg relaxation and budget restraint with the deficit stuck at 10 percent of GDP. The wage bill has been curbed but debt interest payments rose 40 percent in the first half of the July fiscal year. President al-Sisi has hired a specialist security firm to help reverse the 40 percent drop in visitors the latest quarter after terrorist bombing of a Russian airliner, and officials have hinted at possible privatization offerings through the Cairo exchange to mobilize revenue and boost business and consumer sentiment.

Saudi Arabia’s stock market, which partially opened to non-Gulf investors last year, has not reversed course after a 10 percent MSCI decline through February, as worries persist over the 30-year fixed dollar peg there despite central bank commitment as reserves dipped another $20 billion in December to $650 billion. Banks have been warned against currency speculation and forward and CDS spreads have narrowed from initial unease, after the IMF slashed the GDP growth forecast to 1 percent and energy subsidies were modestly reduced. The prudential loan-to-deposit ratio was adapted from 90 percent to facilitate government debt issuance, and mortgage value limits may also change as public spending is pared on a whopping 15 percent of GDP budget deficit. The cost of the Yemen conflict must factor in as well, with a mounting political backlash against the intervention killing hundreds of soldiers. To entice global fund managers, the Kingdom may offer external bonds despite recent downgrade of its prime credit rating and list on the exchange a small portion of Saudi Aramco with estimated total worth in the trillions of dollars. The IPO trend has been lethargic through the GCC, and sharia-compliant investment fund activity likewise shriveled last year, according to industry statistics. Inaugural sovereign placement should be well-received with public debt around 10 percent of GDP, unlike the experience in Bahrain across the causeway where it is 60 percent. S&P downgraded the island two notches to BB causing it to shelve fund-raising. Wages take 40 percent of the budget, and since the Arab Spring outbreak a 10-year $10 billion GCC facility has been a linchpin of offshore center defense