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Tuesday, 8 November 2016

We don’t see 11 November as being a widespread day of protests in Egypt

We have a bit of free association to get things started this morning, including a look at how the international press is positioning chances for unrest this coming Friday (the so-called 11/11 protests), expectations of inflation (the thing that’s got everyone on edge) and what might be a market-clearing rate (the thing that’s going to help pop that inflationary balloon before it gets too big).

Turnover on the EGX hit a five-year high of EGP 2.2 bn as the EGX30 closed up 5.4% yesterday. Interestingly enough, foreigners, regional investors and institutions were net buyers. International investors snapped up EGP 486 mn in shares while domestic investors were net sellers to the tune of EGP 502 mn. Enter a guest column by an FT-owned advisory outfit for the Financial Times’s EM Squared section, which notes that foreign investors need to “weigh attractive yields against the risk of social turmoil.” Egypt, it suggests, was in equal measures “brave” and “desperate” by floating the EGP and raising petroleum prices last week. “Certainly, the drop in the pound … should more or less kill off the parallel market, help revive imports and spur investment, including from abroad. It will also make Egypt more attractive for foreign visitors, which is critical given that tourism accounts for over a tenth of GDP and a big slug of employment.” So what’s the matter? The piece then goes on to note that to generally inflationary environment and persistently high unemployment, it is necessary to “add the increase in fuel prices — however sensible fiscally — and Cairo faces a potentially explosive reaction from ordinary Egyptians, with reports of mass demonstrations planned for November 11.”

Our problem with that: Is there a risk of social pressure after the float? Absolutely. But by all accounts, 11 November is a fiction created by a handful of media types for — one presumes — their own amusement and self-aggrandizement. No credible activist group, social media page or other force of which we’re aware is taking the call for protests this Friday seriously, despite local media reports like this one asserting that local cops in Giza have got a plan. To say that “mass demos” are “planned” is a rather significant overstatement at this juncture. (The very smart Mokhtar Awad has picked up on the so-called leader of the 11/11 movement [tweet]. That said, we disagree that the state is fanning fears of 11/11 — indeed, as we note below, it’s barely mentioning it.)

We’re not alone in suspecting Friday will come to naught: “The pain of Egypt’s currency devaluation may be felt well before the benefits, creating a period of at least several months in which there is little positive news to offset rising inflation and falling living standards,” Reuters notes in a solid reax piece from Andrew Torchia and Ahmed Aboulenein that more than once downplays the chances of protests on Friday.

The government is taking the threat of protest seriously, albeit in an understated way: President Abdel Fattah El Sisi met with the ministers of the interior and defense last night to discuss national security issues, according to an Ittihadiya statement that made no mention of the protests.

What’s the international view on inflation right now? Capital Economics sees it rising to “20% in the coming months, from about 14% in September,” with the Wall Street Journal quoting the outfit’s Jason Tuvey as noting that “food inflation could rise to more than 25% in the coming months” and (as those of you living in Egypt know), the sourcing of FX on the parallel market prior to the float meant “the effects of a weaker pound may have started to have an effect on inflation even before the official exchange rate was devalued.” Capital Economics expects inflation could begin to cool “in the middle of next year.

So, what’s a market clearing rate? The EGP was trading within the banking system at an average of 16.83 yesterday, down from 16.32 on Sunday. By Monday evening, the National Bank of Egypt was offering a selling price of EGP 17.25 to the USD 1, Al Mal reports. Reuters is suggesting that the market-clearing rate is probably somewhere around 18.00 to the greenback, quoting one banker as saying, "Anyone who speculated last week bought USD at high rates and, so far, current rates do not cover the cost of purchase for most of them. The rate will need to hit 18 Egyptian pounds or so to the USD before they off-load, if they do.” The newswire also reports that “Importers, who had been forced to source all their hard currency from the black market for months, said they had obtained USD from the bank since the float. ‘We got about 60 percent of our needs today and this is more than we have gotten in months. We were jumping for joy.’”

Some banks still playing catch-up: Meanwhile, as banks are racing to issue high-interest products to compete with NBE’s and Banque Misr’s and others, including CIB, increasing the limit on their credit cards’ usage abroad by around 3x, HSBC Egypt’s cards are yet to return any meaningful limit. HSBC is not just sticking to its old limits (set for all clients, including Advance and Premier customers, at USD 100 per month), but now the catch is that, despite the note on their website, this limit is presently set based on the EGP equivalent on 17 October. So the most any HSBC-issued card can buy you is around USD 55 a month. God have mercy on HSBC’s call centre employees as they try to explain this to clients.

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