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Sunday, 30 October 2022

ICYMI: Taweem 3.0, IMF loan, rate hike, and more

What the [redacted] happened on Thursday? The Central Bank of Egypt (CBE) at the end of last week went ahead with a series of measures to restore liquidity to the FX market and revive investor confidence in the economy — and topped it off by announcing a USD 3 bn loan agreement from the IMF.

GO DEEPER- We had the full story along with commentary from analysts and experts in Thursday’s edition of EnterprisePM.

Need the short version? Here’s a recap of what went down:

#1- The CBE moved to a “durably flexible foreign exchange rate regime” that allows market forces to determine the value of the EGP, according to a statement (pdf). The CBE price of the EGP fell around 16.3% to settle at a record low of 22.9986 against the USD at Thursday’s close; in banks, it was changing hands at about 23.03 to the greenback.

#2- The central bank also hiked interest rates by 200 bps, setting the overnight deposit rate at 13.25%, the overnight lending rate at 14.25% and its main operations rate at 13.75%. State-owned banks followed up with three-year, high-yield CDs: Banque Misr (pdf), the National Bank of Egypt (pdf), and Banque du Caire each brought to market three-year, 17.25% certificates of deposit alongside other savings instruments with variable interest rates.

#3- And introduced FX forward contracts and swap agreements: The CBE will allow banks to use FX forward contracts, engage in foreign currency swap agreements for corporate clients, and scrap restrictions on non-deliverable forwards for corporate or retail clients, according to a separate circular (pdf). FX swaps and FX forward contracts will be allowed provided they are used to cover documentary collection, L/Cs, repatriation requests from foreign investors, or clients’ proceeds from exporting goods and services. Give our nifty explainer on forwards — which are a type of derivative — a read for a deeper dive.

#4- The CBE will aim to double FX reserves over the course of the next four years, Abdalla said during a presser on Thursday. Egypt’s reserves stood steady at nearly USD 33.2 bn in September, with our primary sources of FX being tourism receipts, exports, remittances, and Suez Canal revenues.

The questions on everyone’s minds right now:

#1- Did the EGP hit a market-clearing rate against the greenback on Thursday? Analysts are penciling in anywhere between EGP 22-25 by the end of next year. In the nearer term, long-time market watcher Hany Geneina sees the EGP overshooting to anywhere between 25-27 against the greenback and ultimately settling at EGP 25 / USD 1 by the end of 2022, while others — including Goldman Sachs — also see the EGP weakening further in the near term. The interbank market on Thursday saw about 10x more USD changing hands than the average day in the past couple of months, a strong indication that something around EGP 22.50-23.50 is the market clearing rate for the USD.

#2- Are we in for a re-pegging down the line? The CBE’s use of the word “durably” before a “flexible exchange rate” points to the intention of keeping the exchange rate flexible. Exchange rate flexibility was a key demand for the IMF loan — and was part of the reason that talks stretched on for months. “The stable FX rate had negative impacts on Egypt’s reserves and the economy as a whole, especially in light of the external global economic shocks,” Finance Minister Mohamed Maait said in recent weeks, explaining why the lender sees a flexible exchange rate as crucial for the Egyptian economy.

#3- How bad will inflation get post-deval? Goldman Sachs sees inflation peaking close to 19% in January, while Naeem Brokerage sees it peaking at 20% by the end of December, “which could require another 100 bps hike.” The uptick, however, will likely be “transient,” Goldman Sachs analysts say. Inflation hit a fresh four-year high of 15.0% in September amid an ongoing surge in living costs fuelled by the war in Ukraine and a weaker EGP.

#4- Was the rate hike necessary? While analysts we spoke to agree that the rate hike was expected and necessary to tamp down on inflation, we flatly disagree.

  • Going for a rate hike to attract hot money is entering a race we cannot win when (safer, more stable) developed economies are in aggressive tightening cycles.
  • Rate hikes are likely to have limited impact on domestic savers;
  • Rate hikes are bad for business when what we really need to do now is build an economy on FDI and exports;
  • And they’re bad for the state budget, driving up debt service costs for the state.


The IMF finally threw us a lifeline: The USD 3 bn, 46-month extended fund facility (EFF) is designed to “provide Egypt with balance of payments and budget support while catalyzing additional financing from Egypt’s international and regional partners to maintain economic stability, address macroeconomic imbalances and spillovers from the war in Ukraine, protect livelihoods, and push forward deep structural and governance reforms to promote private sector-led growth and job creation,” the IMF said in a statement.

And we could be getting up to USD 9 bn: We could unlock additional financing of about USD 5 bn from “multilateral and regional partners” for FY2022-23 that is set to “help strengthen Egypt’s external position,” the IMF said. The IMF will also be in talks with the government over the coming months over an additional USD 1 bn from its resilience and sustainability trust.

The package will keep pressure on policymakers to push ahead with reforms: The package will keep up pressure to drive home reforms and stay the course on building a new Egyptian economy with a focused program to build export industries and attract meaningful FDI. “The limited size of the programme will help maintain pressure on the authorities to see through the adjustment and their reform agenda, and is thus potentially positive for the credit in the long term,” Goldman Sachs MENA economist Farouk Soussa wrote in a note.

Will the carry trade come back? Analysts are divided on whether the small size of the program is enough to win back the attention of foreign investors in EM debt, especially given the tightening financial conditions internationally. Naeem Brokerage wrote that the agreement would bring “sizeable hot money inflows” and could allow the government to take new international issuances to market in the coming 3-5 months. “We expect the total funding gap (which we estimate to be USD20bn for the coming year) to be closed by 1H 2023.” Goldman isn’t so sure: “The funding being made available in the programme is unlikely, in our view, to immediately allay investor concerns regarding Egypt’s medium-term external financing outlook. We therefore do not expect market access to be restored in the immediate term,” Soussa wrote.

WHAT’S NEXT- The funding package still requires final sign-off from the IMF’s Executive Board, which is scheduled to meet to discuss the agreement in December, according to the statement.

The story got a lot of coverage internationally: Reuters | Associated Press | Financial Times | Bloomberg | Wall Street Journal | New York Times.

CORRECTION- In our second reference to the IMF Facility in Thursday’s EnterprisePM, we referred to it as a six-month facility. It is a 46-month facility, as we correctly noted at the head of the issue. We’ve updated the story on our website.

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