Egypt and the IMF: Major step but investors may want morehttp://p.ost.im/p/dLQNsL
1:35 PM - 23 Aug 12 via LinksAlpha · Details
Egypt and the IMF: Major step but investors may want more
Thursday, 23 August 2012 14:56
By Carolyn Cohn
LONDON |
Thu Aug 23, 2012 10:56am EDT
Thu Aug 23, 2012 10:56am EDT
Aug 23 (Reuters) – International investors see
Egypt’s request for a loan from the International Monetary Fund
as a major step to attracting money back into the country, but
may want more progress before they commit their own funds.
Egypt’s request for a loan from the International Monetary Fund
as a major step to attracting money back into the country, but
may want more progress before they commit their own funds.
Once a darling of frontier market investors, Egypt has lost
appeal since the overthrow of President Hosni Mubarak 18 months
ago. Worries about instability have combined with concern over a
declining currency and dwindling foreign exchange reserves.
appeal since the overthrow of President Hosni Mubarak 18 months
ago. Worries about instability have combined with concern over a
declining currency and dwindling foreign exchange reserves.
But Egypt’s official request this week for a $4.8 billion
loan from the International Monetary Fund, announced during a
visit to Cairo by IMF President Christine Lagarde, may help.
loan from the International Monetary Fund, announced during a
visit to Cairo by IMF President Christine Lagarde, may help.
It is likely to avert a currency or debt crisis, investors
say.
say.
“An IMF loan will be seen as positive,” said Daniel Broby,
chief investment officer at Silk Invest. “Although a further
(currency) depreciation is on the cards, a loan will help shore
up the pound against a worse outcome.”
chief investment officer at Silk Invest. “Although a further
(currency) depreciation is on the cards, a loan will help shore
up the pound against a worse outcome.”
Silk Invest holds Egyptian corporate debt and has recently
added to its holdings of bank EFG-Hermes, Broby said,
bringing the frontier fund manager’s Egyptian exposure to nearly
10 percent of its assets.
added to its holdings of bank EFG-Hermes, Broby said,
bringing the frontier fund manager’s Egyptian exposure to nearly
10 percent of its assets.
The Egyptian pound hit fresh seven-year lows after
the loan was announced because investors expect the IMF to
encourage the central bank to allow the currency to weaken more
rapidly.
the loan was announced because investors expect the IMF to
encourage the central bank to allow the currency to weaken more
rapidly.
Since last year’s popular uprising against Mubarak, Egypt
has spent well over half its foreign reserves to support its
currency, allowing the pound to weaken only by about 5 percent
despite a sharp drop in tourism and foreign investment, two of
Egypt’s main sources of foreign exchange.
has spent well over half its foreign reserves to support its
currency, allowing the pound to weaken only by about 5 percent
despite a sharp drop in tourism and foreign investment, two of
Egypt’s main sources of foreign exchange.
But a gradual depreciation of the pound, with financial
support from the IMF, will allow the central bank to rebuild
reserves. It is also less unpredictable for investors than a
sudden one-off devaluation.
support from the IMF, will allow the central bank to rebuild
reserves. It is also less unpredictable for investors than a
sudden one-off devaluation.
“They can’t announce one-way bets, but the IMF could say ‘we
need to have more exchange rate flexibility’,” said Gabriel
Sterne, economist at frontier markets brokerage Exotix. “It’s
about getting the policies in place that restore confidence.”
need to have more exchange rate flexibility’,” said Gabriel
Sterne, economist at frontier markets brokerage Exotix. “It’s
about getting the policies in place that restore confidence.”
MARKETS RALLY
Reflecting the positive sentiment towards the loan talks,
Egyptian stocks are trading at five-month highs, while
the country’s debt insurance costs have fallen by 50 basis
points to around 500 bps in the past week in the five-year
credit default swap market, according to Markit.
Egyptian stocks are trading at five-month highs, while
the country’s debt insurance costs have fallen by 50 basis
points to around 500 bps in the past week in the five-year
credit default swap market, according to Markit.
The yield on Egypt’s dollar-denominated bond due 2020
, which avoids the local currency risk, has
plunged 75 basis points this week, to 5.4 percent, far lower
than the euro-denominated debt of Italy or Spain.
, which avoids the local currency risk, has
plunged 75 basis points this week, to 5.4 percent, far lower
than the euro-denominated debt of Italy or Spain.
Egyptian stocks were among the world’s worst performers last
year, sinking 50 percent, but they have made a 43 percent gain
this year.
year, sinking 50 percent, but they have made a 43 percent gain
this year.
Egypt also has support from other channels. Saudi Arabia
transferred $1.5 billion to Egypt as direct budget support in
June, along with other aid measures. Qatar also promised $2
billion in support this month.
transferred $1.5 billion to Egypt as direct budget support in
June, along with other aid measures. Qatar also promised $2
billion in support this month.
The loan talks also reflect a more secure political
situation, investors say, after Egypt’s military-appointed
interim government handed power to President Muhamed Mursi on
June 30. The military government had been negotiating a $3.2
billion package with the IMF before it handed over, but the deal
was not finalised.
situation, investors say, after Egypt’s military-appointed
interim government handed power to President Muhamed Mursi on
June 30. The military government had been negotiating a $3.2
billion package with the IMF before it handed over, but the deal
was not finalised.
Political risk remains, however, with legal challenges to a
decree issued by Mursi that removes army-imposed curbs on his
powers.
decree issued by Mursi that removes army-imposed curbs on his
powers.
Richard Fox, head of Middle East and Africa sovereign
ratings at ratings agency Fitch, said it was too soon to change
the country’s rating.
ratings at ratings agency Fitch, said it was too soon to change
the country’s rating.
Fitch cut Egypt’s rating to BB-plus with negative outlook in
June, though Standard & Poor’s took Egypt off CreditWatch
negative on Thursday.
June, though Standard & Poor’s took Egypt off CreditWatch
negative on Thursday.
Sterne at Exotix has kept a hold, rather than buy,
recommendation on Egypt’s 2020 Eurobond, with agreement on the
deal not due before the end of the year and the possibility of
popular or political reaction to it.
recommendation on Egypt’s 2020 Eurobond, with agreement on the
deal not due before the end of the year and the possibility of
popular or political reaction to it.
Fox also said it was early days for any deal euphoria.
“There will come a point in the future when we will get a
trigger and it brings back lots of portfolio investments, I
don’t think we are there yet.”
trigger and it brings back lots of portfolio investments, I
don’t think we are there yet.”
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