Tuesday, 20 September 2016

Euromoney Egypt — Day One: “Unleash the beast”

We’re not typically in the business of covering events, but policymakers on stage at Euromoney is a standard draw. As a service to readers who couldn’t take the time out of their day yesterday to go listen in, we had a senior member of staff attend and take notes. Excerpts are below, and we’ll be covering Trade and Industry Minister Tarek Kabil’s remarks this morning, which we’ll carry tomorrow morning.

We’ve also included summaries a handful of other sessions we thought might be of interest.

Amr El Garhy, Minister of Finance, Arab Republic of Egypt

“Unleash the beast” was — hands down — the theme of the first day of this year’s Euromoney Egypt conference. The phrase was coined on stage by none other than Finance Minister Amr El Garhy to highlight Egypt’s potential considering its diversified economy and solid demographics. “We have a very powerful economy. It just needs to be put on the right track,” the minister said. The key component of that track, surprise to none, is the International Monetary Fund (IMF) loan, he added.

But as we near receipt of the USD 12 bn extended fund facility — Deputy Finance Minister Ahmed Kouchouk told reporters at the conference that we’re making good progress on securing additional funding and that we’d be requesting a meeting with the IMF’s executive board within days of building our war chest — concerns have arisen on the impact of the conditions it comes with.

El Garhy hammered that Egypt’s economic reform plans are part of a “homegrown program” with the IMF being only “an important step on the way” toward larger economic reforms. The most important of them: the value-added tax (VAT), which became law last week and has which has faced public criticism for its likely impact on inflation. In fact, 80% of 117 respondents in a Euromoney Conference survey said the IMF agreement was good for Egypt, but 71% responded that it would be bad for all Egyptians.

“Egypt has one of the biggest VAT exemptions lists in the world,” said Garhy, which he said shows its commitment to shielding the poor. The government aims to “take from those who can pay … and give to those who are less capable [of doing so].”

Another part of the reform plan is bolstering FX reserves, which took a hit thanks to the current tourism climate, which El Garhy described as “the worst period in the last 15 years.” However, we can’t live hostage to the tourism industry,” he said, and we “can’t live off GCC aid forever,” adding that the way forward is to grow the nation’s export base, which the government plans to support as part of efforts to shrink the trade deficit.

“It is inevitable that we move forward and we put an economic plan aimed to reduce the budget deficit to less than 10% and create new jobs during FY2016-17 and FY2017-18 … We need to achieve the deficit level that we want to achieve and then see a 1-1.25% reduction in the deficit every year after,” said El Garhy.

As for the Eurobond issuance slated for this year, El Garhy confirmed international interest. There is huge interest and attention from equity and FI fund managers in Egypt’s international bond issuance,” he said. “Will ‘Unleash the Beast’ be the slogan for the issuance when you roadshow?” asked Christopher Garnett, director of Euromoney Conferences. “Yes,” said El Garhy, “because Egypt is a beast.”

Sahar Nasr, International Cooperation Minister, Arab Republic of Egypt

Conditionality is off the table: International Cooperation Minister Sahar Nasr told Euromoney Conferences Consulting Editor Richard Banks that loan conditionality needs to be expunged from our vocabularies. “I’ve stopped using the word conditionality … these are homegrown reforms,” she said. “We’re moving more to an area of partnership with international financial institution, not just loan providers,” she said. “Experience has shown that if reforms aren’t homegrown … they never succeed.”

More important than when or under what conditions the IMF loan will come through is where the funds are going, said Nasr. “We’ve managed to secure USD 15 bn in funding, of which USD 5 bn actually went into the country last year. But we want to move in a sustainable manner.” While diversification is key here, Nasr added that “any major economic reform program has to be packaged with a social program so some groups aren’t adversely affected.”

The private sector is also high on the ministry’s agenda, with Nasr saying they’ve been working with the World Bank on an investment climate survey (published “soon”) to identify the sector’s challenges and ways to address them. “We want to see the economy standing on solid ground … and the only way to do this is to address all the red tape and problems and challenges for the private sector.

When asked if Egypt has turned a corner, Nasr took a cautious approach. “We have moved several steps in the right direction” but added we still have a lot of work to do. However, “Obtaining those loans in the midst of the challenges we face underscores the faith of all parties concerned in our vision and their support for the plan.”

Tarek Tantawy, Deputy CEO, CI Capital

Not the end all be all: For the most part, CI Capital Deputy CEO Tarek Tantawy agreed with Nasr: “It will be a very challenging time ahead,” he said, adding that the IMF loan is mostly a funding cushion to help Egypt achieve the economic goals it’s already set out. “There will have to be a devaluation of the EGP to reflect its true value after the IMF [agreement], but more importantly a more flexible FX regime will have to be adopted.”

But it can’t just be any reduction, he said, adding that the incremental devaluations the CBE has currently been adopting are unlikely to be the way forward. “A reduction in the currency will have to happen — and it will have to be meaningful.”

CI Capital expects the official exchange rate to hit 11.50-12.00 by the end of the year. For perspective, 55% of respondents in the Euromoney Conference survey said the EGP is set to reach 11.00 against the greenback, 27% said 15.00, and 18% put the rate at 9.50.

Where will investment flow? “I see potential in financial services, banking or otherwise, consumer sectors like healthcare, education, and food and beverages, and also logistics due to the investments pumped into infrastructure in the last couple of years,” Tantawy said. Egypt is a combination of an equity, corporate debt, and private equity play, said Tantawy, adding that in the “the extremely low interest rate environment in developed markets, a market like Egypt provides much better room to make returns on debt instruments.” And who will be doing the investing? “While there are challenges in the Gulf, there’s still a lot of interest in Egypt from GCC investors. Investments from Europe will continue as well.”

Panel on macroeconomic environment

With devaluation fresh on everyone’s mind, speakers at a panel on the macro environment made sure to hammer in the fact that a devaluation isn’t the end all be all.

“My inclination is that Egypt will be very cautions [in devaluing],” said Citi Managing Director and Africa Economist David Cowan, who anticipates the EGP will reach 11.45 to the USD by the end of the year. “Until there’s fiscal control, there’s no point in devaluing,” he said, adding that the key for the CBE will be “what regime they move to allow a more gradual adjustment going forward.”

For veteran financial writer Patrick Werr the “currency is a disaster. Nothing is going to be done in this country [without currency reform].” Werr, who pegs the EGP will hit 13.00 by the end of the year, spoke on Egypt’s seven-year cycles of feast and famine, a topic he’d touched on in piece in The National in July. “This time around we’re one year too early,” he said, adding that in his opinion all previous talks between Egypt and the IMF have worked, “with prolonged growth afterwards.”

Cowan made sure to point that the “IMF never sets a devaluation target. It sets a reserve target.” What the IMF is more likely to herald, he said, is more money. “[The agreement] tends to crowd in other people to give you money,” including international financial institutions and the private sector as they begin to believe in the reform program the government has set out. “The IMF is a catalyst for things to happen,” said Cowan, whose firm is one of those appointed to lead manage its international bond offering. “People will buy bonds if there is a homegrown program regardless of an IMF loan.”

Chief Macroeconomist (Egypt) at the African Development Bank Angus Downie expects a small devaluation “in the next week or so,” which will signal to the IMF board that there is “intent.” Downie anticipates the EGP will hit 9.50 to the USD by the end of the year. “The cost of a ‘big-bang’ approach are far too large,” he said, expecting the CBE will devalue over two or three steps early or into the middle of next year. What’s more interesting, he believes, is the interplay between fiscal and monetary policy, reminding us that CBE’s Monetary Policy Committee is set to meet on Thursday. “With core inflation accelerating rapidly … it leaves me to think an interest rate rise of 100-150 bps is in the cards.

Also hot on everyone’s minds is Egypt’s less-than-stellar business environment, which Ahmed Badr, Senior Executive Officer, Middle East and North Africa, Renaissance Capital, says can be helped by the IMF agreement. “Egypt also needs the IMF to bolster the business environment,” he said, adding that it “shows the political will of the government to implement reforms … it will give a stamp of approval for more FDI to come in. The minute IMF [agreement] was announced, we started getting inquiries from investors.

Downie agrees the IMF loan is promising, adding that the bank is keen to see the “homegrown reform program” in action given the “strong results” it has seen already in terms of VAT and the almost-there Civil Service Act. However, he cautioned that the “IMF program will have to be assessed year by year” so as reforms don’t taper off.

NI Capital Chief Executive Ashraf Ghazaly, the man in charge of the government’s IPO program, echoed the concerns on poor investor sentiment, saying most were concerned there hasn’t been a “clear vision for the government. The government’s reform program will streamline that.” NI Capital, if you recall, is undertaking the government’s IPO program, which Ghazaly said is expected to be a five-year process with the first company (or companies) anticipated to list in 2017, he told reporters at the sidelines of the conference. The problem, he said, is we have a “shrinking [ratio of] market cap to GDP at about 15% … we are at the bottom of the liquidity of the market, making it challenging to increase capital.”

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