What to watch for…
A bold prediction on interest rates: The FX market is likely to settle “within six to 12 months, allowing the central bank to aggressively cut rates. ‘Within six to 12 months from now, rates could be down by 700 basis points,’” CIB Chairman Hisham Ezz Al-Arab said.
Will the carry trade come back? A 300 bps hike in rates will make Egypt enticing for the carry trade. How significant is the carry trade? In January 2011 — on the eve of 25 Jan — foreign investors owned about 20% of Egypt’s short-term treasury bills, the FT estimated in a BeyondBrics blog post at the time. In the two years to January 2011, foreign holdings had “soared … from around EGP 5 bn to over EGP 60 bn,” or about USD 10 bn at the time. A JPMorgan survey of EM investors in December 2010 “showed Egypt was one of the four markets where investors had the biggest currency exposure.”
(The carry trade is essentially the practice of borrowing at a low interest rate — say, in USD — then buying another asset that’s likely to provide a higher return, such as another currency that grants a substantially higher interest rate. Like, in theory, the EGP. Still foggy on the carry trade? Khan Academy has a reasonable primer that breaks it down. Watch: run time 4:02.)
What happens to the money changers? Said one of the smartest bankers we know last night: “My only worry is what are they giving to the bureaux de change? You’ll know the government is serious about including them in the process if there’s one in the airport soon.”
When will the IMF executive board approve the USD 12 bn extended fund facility? We think it could happen as early today. Yesterday’s developments and the cut of fuel subsidies overnight were both key IMF conditions. And the CBE and the Ismail government are clearly pushing hard to send the message that “this is really happening” with their decision to keep the banking system open for the weekend. We understand that there is nothing preventing the IMF board from meeting via a previously unscheduled conference call to approve the loan agreement. Otherwise, the board will have multiple opportunities at which to approve the facility in the days ahead: Its public meeting schedule notes sessions scheduled for 4, 7, 9 and 11 November.