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Sunday, 15 January 2023

Foreign investors are starting to come back into the market after Wednesday’s devaluation

The Central Bank of Egypt’s move towards a more flexible EGP seems to be paying off, helping draw in much-needed USDs into the market. Hundreds of mns of USD have changed hands in the interbank market since Wednesday morning, when the central bank allowed the EGP to weaken past 32.00 / USD for the first time ever, bankers reportedly told Reuters.

So where do we stand? The EGP was at 29.61 to the greenback at the end of the banking day on Thursday, down more than 9% for the week and nearly 20% from its value immediately before the 4 January devaluation.

More than USD 800 mn in FX changed hands in the interbank market on Wednesday, according to two bankers, who indicated that foreign institutions were entering the market ahead of Thursday’s t-bill auction. A separate report in state news agency MENA last week put the figure at USD 650-750 mn, around USD 250 mn of which reportedly came from international investors. We have previously reported that senior bankers had said JPMorgan and Morgan Stanley were transferring funds into the country, setting them up to take positions in any number of asset classes.

Thursday’s treasury auction was more than 3x oversubscribed: The central bank was looking to sell EGP 20 bn worth of six-month bills and received bids for EGP 67.7 bn. It ultimately sold EGP 51.9 bn worth of bills at a weighted average yield of 21.0%, according to central bank figures. In the secondary bond market, Arab investors put EGP 7 bn into treasury bonds on Wednesday alone, Bloomberg wrote, citing EGX data.

Trading on the EGX was heavy on Thursday as local investors plowed into equities. Turnover came in at nearly EGP 2.6 bn, or just about 56% above the trailing 90-day averages. Local investors were net buyers. The benchmark EGX30 was just about flat for the day, closing up 0.2%.

WHAT THE PUNDITS ARE SAYING-

“The end of the devaluation process is close,” Citigroup strategists wrote last week in a report picked up by Bloomberg. “Although we do not expect the authorities to shift to a free-floating regime, further flexibility is expected, in line with the fund’s requirements.”

Look for inflation to rise in 1Q 2023: Annual headline inflation is projected to average 25% this quarter as the EGP slides, S&P Global Market Intelligence Senior Economist Yasmine Ghozzi told Bloomberg Asharq in an interview (watch, runtime: 6:56). The weakening currency has already caused inflation to accelerate at its fastest rate in five years.

Another rate hike in the cards? Like most other analysts, Ghozzi expects the CBE to hike interest rates in its next meeting in a bid to tamp down on price hikes, penciling in 100-150 basis points of rate rises this quarter.

Slower buildout of national projects? “Gulf states are unlikely to facilitate additional investment into the private sector unless the government rationalizes un-costed, large mega projects. This is likely to reduce the scope of projects connected to the New Administrative Capital east of Cairo and will probably delay short-term development progress around the El Dabaa Nuclear Plant development on the Mediterranean coast,” Ghozzi writes in a report.

It’s already happening: The government has already committed to budget cutbacks at all but “essential” ministries until the end of the current fiscal year and to limit spending on some national projects that require FX, though some ministries have been ringfenced from the move.

It’s all about reforms: “Pushing through structural reforms and getting investments into state assets will really be key. In terms of Egypt’s longer-term prospects, they depend ultimately on how much the current regime is willing to loosen its grip over the economy,” senior EM economist at Capital Economics, Jason Tuvey, told Bloomberg on Thursday (watch, runtime: 3:06). “The debt position is more vulnerable to weak currency than it was in 2016. The short maturity of debt means it's vulnerable to rising borrowing costs,” Tuvey said, adding that as long as Egypt keeps policy tight debt will come back down.

What to look for now: Progress on attracting fresh funding from the Gulf to priority sectors, rising inflows from Egyptian expats and portfolio investors, and general improvements in EM market sentiment would all improve risk perception and give the country “greater access to the international capital markets,” Ghozzi writes.

WHAT THE GOV’T SAID THIS WEEKEND-

Goods worth a combined USD 645 mn were released from ports last Wednesday and Thursday, Prime Minister Moustafa Madbouly said at a press conference in North Sinai yesterday, according to a cabinet statement. That would put the total value of goods cleared since 1 December at some USD 9.1 bn by our math. The statement didn’t disclose how much remains stuck in ports, though the government previously pegged the value at USD 9.5 bn as of 25 December.

Gov’t emphasizes increased social spend + taxation: Finance Minister Mohamed Maait stressed the government’s increased spending on social security as well as a boost to state coffers thanks to tax reform in a brief mid-year review of the state budget. Maait highlighted the following preliminary figures for 1H 2022-2023:

  • The 14.2% rise in state revenues was largely due to a 19.4% increase in tax receipts, following moves to integrate informal business and widen the taxpaying base;
  • Budget spending on subsidies, grants and social protection grew by 2% y-o-y;
  • Cash subsidies grew 14% y-o-y to EGP 10.7 bn as another 1 mn families were onboarded to the Takaful and Karama social security program;
  • Ration-card subsidies increased 17.5% y-o-y;
  • Education expenditure grew 14.4% y-o-y to register EGP 103 bn;
  • Health expenditure grew 6.6% y-o-y to register EGP 60 bn;
  • The primary surplus grew more than eightfold y-o-y to register EGP 25.5 bn (2.3% of GDP) before debt servicing, up from EGP 3 bn in 1H FY 2021-2022.

What we don’t know: Maait didn’t disclose mid-year figures for growth, the budget deficit, or debt to GDP. We expect more details in the ministry’s annual mid-year report, which should be published in February.

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