Pharaohs in the spotlight

The week before last, both Egypt and Nigeria successfully tapped the Eurobond market. The former raised US$4.0bn from the sale of five, ten and 30-year debt instruments, the latter US$2.5bn from the sale of 12 and 20-year bonds. (The FGN might have wanted to raise more, had it not been for the need to secure the go-ahead from the National Assembly first.) The coincidence prompts us to revisit the different paths taken by the two governments on how to extricate themselves from acute fx scarcity and an economic slowdown.

To recap briefly, in November 2016 the Central Bank of Egypt (CBE) devalued the pound by more than 30 per cent and announced a move to a floating rate regime. The rate was adjusted from EGP8.9 per USD to EGP13.0, and the pound has since weakened to EGP17.7, having briefly traded south of EGP20.0. The CBE also hiked its policy rate by 300 bps to 14.75% in a coordinated step with the devaluation. The executive board of the IMF promptly approved a three-year extended fund facility of about US$12bn.

This facility, like all others, comes with conditionality attached although the Fund insists that the economic programme is “homegrown”. As is universally known, this is the sticking point with the FGN. In Egypt’s case, the government levied VAT, cut electricity subsidies and began to channel some of the fiscal savings into the creation of social safety nets. The agreement with the Fund hastened the release of support from other multilateral agencies.

In terms of results, Egypt can point to some successes. Inflation spiked in response to the float (a description which many fixed-income investors would dispute) and the reduction in subsidies. It peaked at 33.0 per cent y/y in July and has started to fall rapidly, to 17.1 per cent in January, now that the one-off effects have been washed out of the index. The balance-of-payments for the nine months to March 2017 show a net inflow of portfolio investment of USD7.8bn, compared with an outflow of USD1.5bn in the year-earlier period.

There has therefore been a traditional positive response to the fx and other reforms, along with the endorsement of the IMF. This is also evident, if less markedly, from non-energy exports and FDI. Gas production from the huge Zohr field, developed by ENI of Italy, started in December 2016 although, given the extended lead times in the industry, we should be wary of claiming a success for the reform programme. The CBE noted earlier this month that net external demand had driven a recovery in Egyptian GDP growth, to 5.3 per cent y/y in Q4 2017 and 5.0 per cent for the calendar year. Public domestic demand, its commentary added, was a secondary driver, compensating for a fall in private domestic demand.

Gregory Kronsten
Head, Macroeconomic & Fixed Income Research

Source: Business Day, 05 March 2018.
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