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Monday, 3 October 2016

Is the devaluation coming this week?

THE USD 12 BN IMF FACILITY is a “few weeks” out: The executive board of the International Monetary Fund will not consider Egypt’s request for a USD 12 bn, three-year extended fund facility for another few weeks, according to statements by IMF mission chief to Egypt Chris Jarvis picked up by Al Borsa. Finance Minister Amr El Garhy also threw cold water on the notion that the IMF board might sign-off on the agreement immediately following the IMF and World Bank Group’s three-day annual meetings, which are set to begin on Friday. Approval of the staff-level agreement is essentially a formality at this point and does not represent a delay, according to El Garhy. Both Jarvis and El Garhy noted that Egypt is well on its way to securing the USD 6 bn in third-party financing the IMF has required as a condition for approving the extended fund facility.

Research note causes stir domestically: Beltone Finance head of research Hany Genena set off a firestorm over the weekend after wide pickup in the domestic press and on social media of a research note suggesting that devaluation will take place by Wednesday. Genena sees the EGP hitting 11.50-12.50 to the greenback in a two-phase devaluation — and expects a 200-300 bps hike in interest rates by mid-October.

The case for devaluation this week rests on three pieces of evidence: (1) Beltone has crunched the numbers and thinks the CBE has built its liquidity shield, saying Saudi deposits, the eurobond issuance, the loans from China that we noted last week, and the IMF facility will drive net reserves in October to USD 32 bn, far above Tarek Amer’s USD 25 bn threshold for devaluation. Beltone sees the CBE announcing on Wednesday that it had reserves of USD 18.5 bn as at the end of September — a figure it believes would be strong enough to run a devaluation. (2) Pharos Holding, meanwhile, correctly notes that bankers have been asked to update their backlogs of demand for FX, particularly for essential goods. Pharos sees this as a sign that “the build-up of USD liquidity within the banking system is on track and devaluation should follow,” possibly in an exceptional FX auction or at Tuesday’s regular sale. (3) Al Masry Al Youm has cited unnamed sources as noting the government wants to devalue the national currency before the IMF board convenes.

Arqaam Capital also takes the view that a devaluation is just days out, according to Al Mal, and CI Capital also expects a two-stage devaluation once the reserves base is in place, Al Borsa reports.

But are the numbers really that strong? We had a long chat with one of the smartest bankers we know on Thursday, and his take was that however you look at it, we’re still short the USD 25 bn Amer said was necessary for devaluation. The most likely scenario, he suggests, leaves us USD 2 bn short:

  • To get the full USD 4 bn year-one tranche from the IMF right away — and get permission to move it all directly into the market
  • USD 3-5 bn from the eurobond issuance
  • USD 2 bn from China
  • USD 2-3 bn from the GCC
  • USD 6 bn in additional commitments the gov’t has already said it has in hand
  • USD 2-3 bn from reserves (what can actually be moved into the market, not gold and the rest of it)

Meanwhile, the EGP continued its slide against the USD on the parallel market,reaching EGP 13.40 by Al Borsa’s estimates and EGP 13.65 according to traders speaking to Al Shorouk. Conventional wisdom is that the EGP will come under further pressure this week amid the expectation of devaluation.

This post on life after devaluation will go viral: AUC Assistant Professor and Jameel Chair of Entrepreneurship Ayman Ismail writes on evidence for — and implications of — a pending devaluation in a Facebook post: “The reality is that the next quarter will be painful, especially for the middle class (or whatever is left of it) as well as small businesses. Individuals will experience a substantial decline in their standard of living, with unpleasant choices to prioritize their spending. SMEs will experience delays in revenues and cash flow problems.” Definitely worth reading this morning.

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