Egypt’s Crumpled Pound Pyramid
Non-Arab foreign investors again bought Egyptian stocks on early-year general asset class switching and specific central bank moves toward greater currency flexibility with the introduction of regular auctions and deposit withdrawal fees and limits, as dollarization increased with reserves at $15 billion and the outline IMF agreement on hold until February parliamentary elections. The new governor Ramez joins a fresh Finance Minister with an academic background after a cabinet shakeup and has not ruled out stricter exchange controls as the 6.5 to the dollar handle was immediately breached. Qatar doubled assistance and loan pledges to $5 billion after the changes equal to the mooted Fund program, as US, EU and African Development Bank participation remain pending. All bilateral and multilateral providers have underscored the importance of wide political consensus for fiscal and balance of payments and structural adjustments which have already proven elusive with government backtracking on commodity subsidy reductions in the face of party and popular opposition. President Morsi’s assertion of unilateral powers and rewriting of the constitution has further split the respective religious and secular factions, with Salafists pitted against the more moderate Muslim Brotherhood and civilian and military figures vying for leadership elsewhere. Economic platforms are not articulated in detail although greater credit access for small business is a standard nostrum. The private sector has been crowded out by heavy Treasury bond demand, with bank exposure as a fraction of deposits now over 50 percent. Non-resident portfolio inflows are still minimal with benchmark yields approaching 15 percent. In external accounts remittances have been solid to help offset the trade gap while tourism and Suez Canal revenues continue to disappoint. Devaluation could improve earnings and historically have boosted GDP growth half a point. However the hydrocarbon sector which was previously an export pillar will again run a deficit, as energy at home must also be more market-priced to keep the fiscal shortfall under 10 percent of GDP.
Turkey, which topped all stock exchanges in 2012 with a 60 percent gain, likewise fulfilled a $500 million commitment to Cairo over the period, as the central bank signaled minor easing in its multi-tiered framework with year-end inflation within the target range at 6.5 percent. Yields on local and foreign bonds are at record lows, with soft landings in credit and economic growth and the current account deficit around 7 percent of GDP. Bank and corporate issuers have joined the sovereign in tapping overseas debt appetite with long-awaited assignment of an investment-grade rating, despite political and geopolitical cross-currents. The prime minister is preparing a presidential run in the coming months and may replace his deputy Erbacan as the main global business community representative and Syrian refugees continue to pour across the border as a separate Kurdish enclave may straddle it. A poorly-drafted capital markets law revision which banned negative commentary also caused brief consternation before promised revisions devalued the threat.
