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Wednesday, 10 August 2022

In a hunt for foreign currency, we’re going to ration electricity

Egypt will begin cutting back on electricity consumption nationwide from next week in a bid to redirect more natural gas towards exports, thus netting additional inflows of foreign currency, Prime Minister Moustafa Madbouly said yesterday at a press conference (watch, runtime: 18:39). The government hopes to export around 15% of the gas that is currently allocated to the nation’s power stations, the PM said.

Here’s what to expect: Darker streets and public squares, electricity rationing at sports facilities and government buildings, and limits on A/Cs in malls, Madbouly said. Hotels will also be asked to rein in their consumption by reducing lighting at weddings, while sports fixtures could be rescheduled to daylight hours to cut energy use at stadiums, cabinet spokesperson Nader Saad told Ala Mas’ouleety last night (watch, runtime: 39:43).

Full details coming Thursday: Cabinet is planning to announce a basket of measures to restrict public electricity consumption following a cabinet meeting tomorrow. The measures will come into play next week.

It’s all about foreign currency: “We have been taking clear and calculated steps towards increasing Egypt's FX reserves and reducing our import bill, and now we're looking at how we can better utilize the natural resources available to us in order for them to bring in more FX,” Madbouly said yesterday.

And here’s why: External pressures triggered by the war in Ukraine and rising interest rates in developed markets have squeezed foreign-currency liquidity in the banking system and caused the country’s FX reserves to fall 20% since March. Surging commodity prices have added bns of USD to the country’s import bill and volatility in the financial markets has seen USD 20 bn in portfolio flows exit the country this year, putting pressure on the EGP which has slipped almost 22% since March.

Natural gas is a good earner — especially with a once-in-a-lifetime energy crisis brewing across the Med: Egyptian LNG is in increasingly high demand in Europe as the continent frantically tries to find replacements for Russian natural gas, which before the war provided around 40% of its gas consumption. European leaders are particularly concerned about looking in additional supply contracts ahead of winter, when demand for natural gas spikes. Egypt signed a landmark agreement with the EU and Israel earlier this year to increase exports to Europe, and while it remains unknown how the three partners plan to raise capacity or who will finance the necessary infrastructure, Egypt has been in talks with foreign investors about providing capital for new LNG terminals and pipelines.

Steps have already been taken in this direction: Since October, a number of power stations have transitioned from using natural gas to mazut, giving the government a greater surplus to export and bringing in USD 100-150 mn a month, Madbouly said.

If the target isn’t reached? The government could move to further restrict electricity use Saad said, adding that the measures could be reconsidered if stressors caused by the Ukraine conflict begin to wane.

The news got attention internationally: Bloomberg.

IN THE BACKGROUND- How much would the EGP have to devalue to be priced “right” against the greenback? The news of electricity rationing came on the same day Bloomberg was out with a piece asking how much further the EGP will have to fall to narrow the country’s funding gap. Estimates range from 5% (Citi) to 10% (Deutsche Bank + Goldman Sachs), while Bloomberg’s emerging-markets economist, Ziad Daoud, writes that we might need to see the EGP changing hands at 24.60 to the USD (a 23% depreciation from current levels). Daoud had previously outlined his login in this thread on Twitter.

REMEMBER- Conventional wisdom has it that the IMF is unlikely to agree to give us fresh assistance unless we agree to maintain a flexible exchange rate policy. The two sides have been in talks over a new program since March but are yet to agree terms. Though the Fund last month called on the government to take “decisive” steps towards fiscal and structural reforms, President Abdel Fattah El Sisi has publicly appealed for less stringent conditions

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