Lower Gas Imports, High Tourism Revenues, and T-Bills: Keeping the Egyptian Pound Stable

The executive board of the International Monetary Fund (IMF) completed its fourth review of Egypt’s economic reform programme this week, a condition of its $12 billion loan.

The completion of the review means Egypt will now receive the fifth tranche of the loan of $2 billion, bringing the total disbursements to $10 billion.

The news comes almost a month after the expected date in December, a delay caused by concerns from the IMF at how Egypt would implement its new fuel-pricing strategy, a socially sensitive step.

Since the IMF deal was signed in November 2016, Egypt has embarked on a wide-ranging reform programme that has aimed at tightening the budget deficit by imposing new taxes and slashing fuel and energy subsidies.

It has also lifted its hands from the foreign-exchange market by liberalising its currency, leading it to depreciate by almost half.

As a result, the prices of commodities and services across the board have increased, and the lives of millions of Egyptians, almost 40 per cent of whom live close to the poverty line, have become harder.

IMF Chief Christine Lagarde praised Egypt’s reforms last week, saying that she would recommend that the board approve the recently completed review. Minister of Finance Mohamed Maait also recently said that Egypt was unlikely to ask the IMF for another facility when the current programme expires.

The disbursement of the $2 billion tranche is a piece of good news, and it added to other news that included the increased foreign appetite for Egyptian treasury bills.

Foreign portfolio investors last week showed a renewed interest in Egyptian treasuries, buying one-third of Egyptian local-currency treasury bills and more than half of longer-dated bonds auctioned during the week, according to the Ministry of Finance.

More impressively, they snatched 100 per cent of the five-year bonds, a clear sign of confidence in the economy, according to the Ministry of Finance.

This increased foreign holdings of Egyptian treasuries to $12 billion, a noticeable improvement after the emerging markets crisis triggered selling off the equivalent of $10 billion during the second half of 2018.

The dollar’s losing some ground on the back of the US Federal Reserve’s decision last week to hold to current US interest rates, and not to increase them as expected, fed the foreign interest in emerging markets securities, including those of Egypt.

But Egypt stands out among its peers as it offers the highest yields after Argentina, with a 17.59 per cent yield, according to Bloomberg news.

The renewed foreign interest raises hopes about the potential of upcoming Egyptian debt issues in the international markets.

The Ministry of Finance is planning to start a roadshow soon to promote its international bonds in Asian markets. These will include yen, euro, and dollar-denominated bonds. The ministry is planning to sell between $3 and $7 billion worth of bonds during the current year.The government may also issue sovereign sukuk bonds compatible with Islamic Sharia Law in the coming fiscal year as part of its strategy to diversify its debt instruments. The issue, the first of its kind for Egypt, could be worth $1-1.5 billion, according to Enterprise, an online business research company.

Egypt also approached the US investment bank JPMorgan Chase to be included in its emerging-market bond indexes, Maait said last week.

“Our strategy aims to reduce our borrowing costs and make our debt more attractive. Joining the index would have a positive impact, as it will attract passive investors to Egyptian debt instruments,” he told Bloomberg.

While Egypt relies heavily on borrowing to finance its funding gap, its foreign debt stood at $92 billion in June last year, up 17 per cent from its level a year earlier and compared to $56 billion in 2016. It is currently seeking to lower the cost of borrowing.

EFFECTS ON THE POUND The pound gained two per cent versus the dollar last week, and there should not be too much volatility in the currency this year, said US bank Goldman Sachs in a research note.

It explained that an improving current-account position would help to support the pound against downward pressures over the medium term.

The decline in the fuel-imports bill, a recovery in tourism receipts, and steady remittances inflows should push the current account into surplus territory in the coming fiscal year and remove any downside pressure on the nominal exchange rate, it noted.

Oil imports are expected to drop in the coming period given “low domestic demand after another expected wave of subsidy reforms in addition to the ongoing development in the offshore gas sector,” noted a research note by Prime Holding, a consultancy.

“Thanks to the launch of the Zohr field with other major discoveries in the Mediterranean, Egypt expects to become a net gas exporter by the end of 2019,” it added.

Tourism revenues surged by 46 per cent during the first quarter of 2018/2019 as the number of tourists and their average spending remained rising since the corresponding quarter of the previous year.

According to a World Travel and Tourism Council report, Cairo was the world’s fastest-growing tourist destination in 2017, witnessing a 34.4 per cent growth in tourism and travel GDP followed by Macau, Istanbul and Dublin.

Remittances from Egyptians living abroad also rose 5.7 per cent in the first 11 months of 2018 to reach $23.3 billion compared to $21 billion during the same period last year, according to the Central Bank of Egypt (CBE).

However, Goldman Sachs expects the real effective exchange rate, which takes into account the inflation rate of the country versus that of another country in determining the exchange rates of their currencies, to appreciate as inflation in Egypt continues to exceed that of its trading partners.

Accordingly, the pound is expected to lose eight per cent per year over the next three years, it said.

Capital Economics, a London-based research group, seconded such expectations. “The appreciation of the Egyptian pound this week appears to have been driven by a spurt of foreign portfolio inflows, but we still think that the currency will record a modest fall in the next couple of years,” it said in a note issued earlier this week.

“While the external position is on a firmer footing, an ongoing slowdown in the global economy is likely to cause risk appetite to wane over the coming months.”

More fundamentally, it said, inflation in Egypt will remain higher than in its trading partners. Accordingly, in order to prevent an appreciation of the real exchange rate and maintain Egypt’s external competitiveness, the nominal exchange rate will need to weaken.

“We expect the pound to edge down from LE17.6 per dollar to LE19 per dollar at the end of this year and to LE20 by the end of 2020,” it concluded.