Egypt’s bid to woo IMF may entice foreign aid
Egypt’s ability to secure the foreign aid crucial to pulling it out of the worst economic slump in a decade may hinge on its success at persuading the International Monetary Fund to give it money this week
. The North African nation, which has taken steps to rein in spending in the past month, is starting negotiations with the IMF on a $3.2 billion loan Monday. Since the ruling military council vetoed a similar deal last June, Egypt’s need for funding has become more acute after foreign reserves plunged 32 percent to $18.1 billion and local one-year borrowing costs jumped 2.57 percentage points to 15.56 percent.
“On its own, IMF help isn’t enough,” Richard Fox, London-based head of Middle East and Africa Sovereigns at Fitch Ratings, said by telephone Jan. 12. “But assuming it catalyzes international support, it should help stabilize Egypt’s finances. Investors want to make sure they’re lending into a sensible policy regime, and an agreement with the IMF gives them comfort that their money won’t be wasted.”
In a “benign scenario,” aid from the IMF and other sources would help Egypt meet short-term financing needs, thereby easing pressure on borrowing costs as the country moves toward greater political stability with the transfer of power to a civilian government by the end of June, Fox said.
Perceptions of Egypt’s credit risk improved ahead of the IMF visit, although they remain the highest in the Middle East. Five-year default swaps lost 20 basis points to 624 on Jan. 13, the biggest drop since October, according to data provider CMA. That compares with 283 for Tunisia, where a wave of regional uprisings started last year, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
Egypt has struggled to obtain foreign aid since a popular uprising almost a year ago ousted former President Hosni Mubarak, in part due to a lack of clear fiscal policy. Prime Minister Kamal al-Ganzouri’s government tried to change this in the past month by unveiling plans to meet an 8.6 percent budget deficit target for the fiscal year ending June 30. The plan includes lifting subsidies for energy-intensive industries, cutting public spending by 20 billion pounds ($3.3 billion) and canceling sales of three-month debt to reduce interest expenses.
Arab and Western countries have yet to deliver on promises to provide aid, Ganzouri said last month. He said “nothing has arrived” from the $35 billion pledged by the Group of Eight major economies to Egypt and Tunisia. Only $1 billion of the at least $7 billion pledged by Persian Gulf governments has materialized, the prime minister added.
“The impact of IMF funds on the economy won’t be the same as it would have been had Egypt accepted the money in June,” Wael Ziada, head of research at EFG-Hermes Holding SAE, said by telephone Tuesday.
“The funding will help in the short term, but longer-term risks remain because the political situation hasn’t been settled yet.”
Egypt’s economic and fiscal situation has deteriorated as it waits for aid. Economic growth slumped to 0.2 percent in the fiscal first quarter ended Sept. 30 and the balance of payments turned into a deficit of $2.4 billion in the three months, compared with a surplus of $14.7 million a year earlier.
Tourism revenue, a crucial source of hard currency for the Arab world’s most-populous nation, tumbled 30 percent in 2011. Foreign investors sold off $7.5 billion in local bills and bonds in the first nine months of last year, leaving the state to rely on local banks to funding.
Egypt will complete elections for the lower house of parliament, which started in November, within days and the body will convene Jan. 23, two days before the anniversary of the start of anti-government protests last year. Registration of candidates for the presidential election will start on April 15, the state-run Al-Ahram newspaper reported Monday, citing a television interview with Major General Mohsen al-Fangary.
Still, the ruling military council, which took over from Mubarak last year and counts Fangary as a member, hasn’t announced when it will end a 30-year emergency law or end military trials of civilians, two demands of demonstrators who continue to hold periodic protests.
Ahead of the IMF talks, the yield on the government’s 5.75 percent dollar bonds posted its biggest single-day drop in almost a year, falling 37 basis points, or 0.37 of a percentage point, according to data compiled by Bloomberg. The yield dropped another three basis points Monday to 8.28 percent at 2:41 p.m. in Cairo. The average yield on Middle East sovereign bonds was at 4.96 percent on Jan. 13, according to the HSBC/Nasdaq Dubai Middle East Conventional Sovereign U.S. Dollar Bond Index.
To reduce borrowing costs, already at records on all treasury-bill maturities, Egypt canceled about 14.3 billion pounds in sales of three-month treasury bills this quarter. It will offer $1 billion in dollar-denominated one-year treasury bills tomorrow, its third such sale in as many months, having raised $2.53 billion at about 3.9 percent at the previous sales.
Egypt sold three- and five-year pound debt Monday at average yields of 16.15 percent and 16.39 percent, respectively. Any aid from global and regional donors is likely to have strings attached. The IMF may push Egypt to reduce fuel subsidies, according to analysts including Fitch’s Fox and Moustafa Assal, head of fixed income at Cairo-based Beltone Financial Holding.
The nation’s bill for subsidizing the cost of gasoline could reach 114 billion pounds in 2012 compared with 100 billion pounds last year, Al-Mal cited Hani Dahi, chairman of Egyptian General Petroleum Corp., as saying this month. At a time when crude oil prices hover around $100 a barrel, Egyptians pay 1.85 pounds per liter of 92-octane fuel, or the equivalent of $1.16 a gallon. The government has no plans to raise fuel prices, state television reported Monday.
“The IMF will at least force the government to be more transparent and push for reducing subsidies and the budget deficit,” Assal said by phone Tuesday. “The government won’t be ready to meet all demands such as cutting fuel subsidies, but if the fund doesn’t see progress, it won’t be inclined to lend more in the future.”
With its higher spending bill, Egypt is unlikely to meet its deficit target, according to analysts at Moody’s Investors Service and EFG-Hermes, the biggest publicly traded Arab investment bank, who expect the budget shortfall to reach at least 10 percent of economic output this fiscal year. Moody’s cut Egypt’s credit rating four times to B2 in 2011, taking it five levels below investment grade.