BNP Paribas has revised down its prediction on the size of the loan we’ll be getting from the IMF to USD 3-5 bn in a research note yesterday. The French bank in July said we would need USD 10 bn or more from the multilateral lender to plug our growing funding gap. Predictions of a mega-loan have been tempered by officials including Finance Minister Mohamed Maait as well as by Tarek Amer when he was still governor. Maait says we’re in talks for a “limited” support package, but has not put a figure on how big that could be in monetary terms.

Talks with the IMF could conclude by September or October, when the IMF and the World Bank will hold their annual meetings, BNP MENA economist Mohamed Abdelmeguid wrote in the note. Talks with the Washington-based lender are in the “final stages,” Prime Minister Moustafa Madbouly said last week, without providing any other details.

Egypt needs USD 26.2 bn in the current fiscal year to fund debt repayments and cover our current account deficit, “marginally lower than in previous years, but comes up against the challenging backdrop of depleted central bank reserves and a large net foreign liability for commercial banks,” Abdelmeguid wrote. BNP expects USD 11.2 bn to be covered by foreign direct investment inflows and another USD 6.3 bn from portfolio inflows, leaving a USD 8.7 bn funding gap in FY 2022-2023.

As was the case in 2016, we’re going to need to line up funding from other sources if we want to unlock an IMF facility. Here’s how BNP Paribas thinks it will play out in the coming weeks before an IMF facility is announced:

• More development finance from non-IMF sources: BNP is predicting we’ll see “a number of loans, budget support programmes and trade credits to ease pressure on FX reserves.” We could be knocking on the door of multilateral lenders including the World Bank, Islamic Development Bank, French Development Agency, and the African Development Bank for an additional USD 4 bn this fiscal year, BNP says.
• More help from the GCC: “We also anticipate stepped up investment by Egypt’s regional allies — namely the GCC — as part of the funding framework agreed with the IMF,” the note reads. Qatar could be next to buy stakes in EGX-listed companies, the bank says, echoing recent murmurs in local media. The Saudi and Emirati wealth funds have invested bns of USD this year to buy stakes in big local names across the public and private sectors.
• Moving FX reserves in the right direction: The IMF “is likely to make its support conditional on an increase in central bank reserves,” BNP writes. Foreign reserves slipped to USD 33.14 bn in July and have declined by almost 20% since March, as the central bank intervenes to cover portfolio outflows, finance imports and meet debt repayments.

STRINGS ATTACHED?-

#1- BNP is joining the gradual deval gang: The bank is the latest in a string of market-watchers to predict that new central bank governor Hassan Abdalla will gradually allow for more flexibility in the EGP exchange rate as the bank looks to address foreign portfolio outflows, rather than going for a 2016-style shock devaluation. The bank expects “increased flexibility” after the agreement with the IMF goes through and sees the currency sliding to EGP 23-24 to the USD by the end of the year. “In our view, a freefloat is still a distant scenario,” the note reads.

#2- Bread subsidy reform may not be off the negotiating table: “Bread subsidies have been untouched until now but are likely to be curtailed once the inflationary effects of the Ukrainian conflict start to subside,” Abdelmeguid wrote.

#3- It’ll need to sort out its privatization strategy: “The government will be expected to finalize a credible timeline for the acceleration of its privatization programme,” the note reads. Since opening talks with the Fund this year, the government has put its privatization strategy higher up the agenda and has been holding consultations with stakeholders over its plans to increase private sector involvement in the economy. Privatization has been slow in recent years, with the government only offering secondary stakes in two state-owned firms since its launch in 2018.