Egypt’s Subsidy Attack Subtext

Egyptian shares were up over 10 percent through July as President El-Sisi under Gulf donor prodding hiked fuel prices and taxes to limit next year’s fiscal deficit to 10 percent of GDP, and ordered the security forces into the streets to control protests and gouging. Urban inflation could tip again into double digits with the subsidy slash, and Treasury bill yields rose immediately in response. Capital gains tax and VAT will be levied in another measure as power shortages persist to cap GDP growth at 3 percent. On the balance of payments, reserves have steadied at over $15 billion with the GCC infusions but tourism is off 60 percent by the latest figures on FDI under $2 billion. State debt to foreign oil suppliers is above $5 billion and a dozen previous privatization deals were undone to add to official obligations. A new investment authority aims to facilitate approvals and raise the World Bank Doing Business score in the bottom third of the listing. Tunisia has embarked on its own outreach program in the US, Europe and Asia with stocks flat there before historic presidential and parliamentary elections following constitutional compromise between Islamic and secular parties. Under its IMF program monetary policy was tightened to combat 5 percent inflation as reserves are down to just three months’ imports. Gradual subsidy reform is designed to reduce the 8 percent of GDP budget deficit, although strikes continue to hurt investment off one-third through mid-year. Moroccan equities have not budged either despite another Fund precautionary arrangement which tackles sensitive pension outlays as phosphate exports dipped 15 percent. Economic growth is put at around 3 percent assuming good rainfall for agriculture and continued Gulf aid. Jordan’s $1 billion US government-guaranteed bond helped lift its MSCI component 5 percent, but resumed internal conflict in Iraq with the terrorist-led ISIS claiming vast swathes of territory will choke 15 percent of exports. Lebanon has been roiled by Syria’s and the reignited Israel-Palestinian confrontation with refugees now one-quarter of the population and the direct and indirect costs totaling almost $5 billion according to officials.

 In the Gulf Saudi Arabia and the UAE as major Egyptian backers have experienced their own setbacks as the former’s non-oil sector weakened in Q1 with sentiment hurt by the mysterious MERS virus, and the latter bourse corrected sharply post-MSCI upgrade, with bellwether Arabtec falling 60 percent on property and management worries. Dubai corporate and sovereign bonds were well-received but issuers like Dana Gas and Abu Dhabi Energy have large Iraq exposures. Dubai’s Knight Frank housing index was up 30 percent in Q1 as annual credit growth runs at a 15 percent clip despite central bank macro-prudential curbs. Saudi bank private loans are advancing 10 percent, but public ones have jumped 30 percent as infrastructure spending ramps up to accompany oil production fluctuating on Libyan and Iraqi violence transfers.