The FGN will do it its way

On 03 November 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 US dollar to EGP13.0, and the pound has since weakened to EGP18.9. The CBN also hiked its policy rate by 300 bps to 14.75% in a coordinated step with the devaluation. On 11 November the executive board of the IMF approved a three-year extended fund facility of about US$12bn including an immediate disbursement of about US$2.75bn.

This loan, like all others, has conditionality attached although the Fund insists that the economic programme is “homegrown”. For example, the country now levies VAT. Electricity subsidy costs have been reduced, and some fiscal savings are being directed to the creation of social safety nets.

The agreement with the Fund hastened the release of support from other multilateral agencies. Bank credit lines over time will be reopened. The authorities will be able to rebuild reserves, which had fallen below US$20bn. We should also see some pick-up in direct investment, particularly from the Gulf.

The government has now begun a roadshow for a Eurobond launch to raise an estimated US$2.5bn. The finance minister noted last week that the reforms were popular with offshore portfolio investors, and suggested that, once the government had built up its track record on reform, the EGP-denominated debt securities market could see inflows of US$10bn. (Such holdings are currently said to be less than US$1bn.)

Gregory Kronsten
Head, Macroeconomic & Fixed Income Research

Source: Business Day, 23 January, 2017.
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