By Mirette Magdy
(Bloomberg) — Egypt is in the throes of a familiar crisis;
the currency has plunged, foreign-exchange is in short supply
and living costs have soared. It’s a once-a-decade experience
that’s made the country the International Monetary Fund’s
second-biggest borrower after Argentina.
Policymakers say this time is different, and a swathe of
promised reforms stand to give a makeover to Egypt’s markets,
economy and perhaps society as a whole. But that hasn’t made it
much easier to predict when the current crunch may end.
Here are five areas to watch that may show where things are
heading next.
The Pound
In compliance with a longstanding IMF demand that helped
secure a $3 billion deal, the Egyptian currency is more
flexible. But long stretches of stability have followed bursts
of volatility and steep downswings.
Ending that uncertainty, and showing the practice of using
international reserves and banks’ foreign assets to protect the
pound has been truly cast aside, may be key to almost everything
else. Investors won’t pour more money into bonds or company
stakes if they can’t rule out another plunge in the currency.
Some more modest dips and climbs for the pound in the weeks
ahead would be a sign it’s more accurately reflecting supply and
demand. The steady resumption of some imports after the clearing
of a backlog at Egypt’s ports would also show foreign-exchange
flows are improving and pressure on the pound easing. But while
the steepest falls may be over, analysts including at Standard
Chartered Plc and HSBC Holdings Plc aren’t ruling out more
weakening this year.
Debt
The days when foreign investors held over $30 billion in
Egyptian local debt may be long gone, but a modest revival in
overseas interest before July will signal the country is on
track to cover its immediate funding gap.
Authorities are targeting $2 billion in net inflows by
then, a goal that likely depends on investors’ confidence the
pound isn’t being closely managed and yields on local securities
are not negative when adjusted to inflation. Appetite remains
weak, going by a gauge of demand for Egypt’s 12-month
securities.
A much larger reliance on bond sales will ring alarm bells,
indicating Egypt is rowing back on plans to wean itself off hot
money and returning to an approach that helped spur the current
crisis.
Gulf Aid
Expectations that Egypt’s Gulf allies would fully open the
taps have been misplaced. Almost a year since more than $10
billion of investment was pledged, only a fraction of this
funding the IMF has called critical has materialized. Saudi
Arabia’s recent comments about seeking reforms before it
supports other nations sparked speculation over the holdup.
All this means the next large-scale deal — mostly likely
involving the sale of an Egyptian state-held stake of a major
company to the United Arab Emirates, Qatar or Saudi — may be a
watershed moment, swiftly followed by more transactions. It may
signal Gulf investors see the pound as having bottomed out,
finally allowing them to settle on what they see as fair local
prices for assets.
State Exit
Deep in the IMF’s latest report were lines that may be key
to Egypt’s future: a promise that overarching state involvement
in the economy, including by the army, will be curbed. It
tackles head-on a long-standing complaint that the private
sector has been crowded out, discouraging badly needed foreign
investment.
Read More: Egypt Puts State Assets Up for Sale to Hunt
Foreign Exchange (2)
No one’s pretending it’ll be easy. The IMF, which also won
a pledge that state entities will regularly open their accounts
to the Finance Ministry, has warned any re-balance “may face
resistance from vested interests.” Egypt has named 32 state-
owned assets in which it’s selling stakes, and swift movement on
the offerings would be taken as a positive step. Also key will
be the long-mooted first-ever sale of an Egyptian army-linked
firm — that of Wataniya, a fuel distributor running a vast
national network of gas stations.
Inflation
Galloping inflation that’s showing no sign of easing is
heaping misery on Egypt’s more than 100 million people, working
and middle classes alike. Food prices soared in January at the
fastest pace on record, and the government says tackling the
surge is a top priority. Families are cutting back and Ramadan-
period state discounts have been introduced early. The state
nutrition watchdog’s suggestion that Egyptians eat more chicken
feet spurred anger.
Authorities are mindful of the risks; increasing costs of
living helped trigger the Arab Spring uprisings a little over a
decade ago. When inflation begins to slow — possibly in the
second half of 2023 at the earliest – that might give some
modest comfort.
–With assistance from Farah Elbahrawy and Netty Ismail.
To contact the reporter on this story:
Mirette Magdy in Cairo at [email protected]
To contact the editors responsible for this story:
Sylvia Westall at [email protected]
Paul Abelsky, Michael Gunn
