President Abdel-Fattah Al-Sisi held a phone call last week with International Monetary Fund (IMF) Managing Director Kristalina Georgieva. According to a statement by the presidency, they highlighted their “constructive partnership”, with Georgieva stressing the fund’s commitment to strengthening consultation and coordination with Egypt. The call was important in reassuring the market about Egypt’s relationship with the IMF following delays to the IMF’s first review of latest loan.
The IMF approved a 46-month $3 billion Extended Fund Facility for Egypt in December 2022. Of that sum, $347 million has been disbursed. The IMF has yet to carry out its review of the first tranche of the loan. Originally scheduled for mid-March, the review is a prerequisite for disbursement of the second tranche. The review is to allow the IMF to ensure the authorities are implementing the reforms they promised.
Ali Metwalli, risk analyst at Infospectrum, a UK-based counterparty risk appraisal services company, told Al-Ahram Weekly there are a number of steps remaining to ensure a successful review. They include the sale of state-owned assets and a permanent shift to a flexible exchange rate regime. Implementation of these measures, says Metwalli, has been challenging in the face of a highly volatile global market, resulting in reluctance to proceed with asset sales.
“Only 10-20 per cent of planned sales have been completed,” he said. And there have only been temporary shifts to a flexible regime. Since March 2022, Egypt has devalued the pound three times, and it has lost more than 50 per cent of its value in the process. In January, the value of the pound went from LE25 to LE29 per dollar, but since then it has depreciated only slightly. It is now officially trading at around LE31 per dollar, compared to close to LE40 on the black market.
Metwalli is not in favour of further currency devaluation or an immediate shift to a flexible regime due to potential long-lasting negative consequences. Egypt’s annual headline inflation stood at 31.5 per cent in April.
Eventually, he said, Egypt should adopt a flexible regime, but it will be advantageous to do so next year given the expected easing of global interest rates and inflation pressures by the second and third quarters of 2024.
A note by Citigroup did not forecast any sharp movement in the pound’s value before the end of June. It believes the Central Bank of Egypt will probably wait for bumper tourism revenues of about $14 billion to filter through the economy before making any move. On Monday, Minister of Tourism and Antiquities Ahmed Issa said Egypt expects a total of 15 million tourists in 2023 — a figure which, if met, would break the 14.7 million record set in 2010.
Egypt is in a tough external financing position, with challenges facing market access, pending net repayments to international financial institutions, and a lineup of investors reluctant to commit further capital in the absence of a stable exchange rate and structural reforms, Mohamed Hanafi, managing director of LYNX Strategic Business Advisors, told the Weekly. Egypt’s external debt stood at around $163 billion in 2022, five times its size in 2017 according to an infographic by DCode Economic and Financial Consulting. At the end of September 2022, $44.2 billion of the total external debt stock was due to mature within one year, though the rescheduling of GCC deposits could reduce the amount significantly. Around a quarter of Egypt’s debt is owed to GCC countries. Meanwhile, Egypt’s Minister of Planning and Economic Development Hala Al-Said told the Senate this week that Egypt will not take out new loans except for compelling developmental needs.
The delay in the IMF review has impacted investor confidence, said Metwalli, at a time of weak investment sentiment worldwide due to high business costs and global economic factors. Nonetheless, he said, since the beginning of 2023 there have been a number of investment projects and manufacturing deals with multinational companies, and investment decisions, including the golden license, have contributed to the growth of private investment.
“The Supreme Investment Council’s recent decisions sent positive signals about the commitment of the country’s leadership, at the highest executive level, to enhancing private investments,” says Hanafi. In late May, the government issued 22 directives intended to boost private sector participation in the economy and facilitate foreign direct investment.
Metwally believes total investment is likely to continue growing this year, especially with a concerted effort to promote the country’s sectoral development plan and the 22 investment decisions.
Several new investments have been announced. They include plans by South Korea’s Samsung Electronics to establish a new factory for smartphone assembly in its industrial complex in Beni Sweif. Golden licences have recently been granted to BSH Egypt, owned by the German Bosch group, a major home appliance manufacturer, and Beko Egypt Group, a Turkish company, to produce home appliances and durable goods. Golden licences were introduced to facilitate the setup of new projects by minimising red tape. Sumitomo Electric, headquartered in Japan, began working on the first phase of its new pigtails cable factory in 10 Ramadan city, the Trade and Industry Ministry said earlier this week. It will produce pigtail cables for a million cars annually.
Hanafi cautions, however, that in the absence of decisions that offer certainty on the exchange rate, the IMF review process and progress on asset sales may be further delayed.
There was some positive news this week. CNN Arabic reported that the Egyptian government is negotiating the sale of a 49 per cent stake in the Egyptian Drilling Company (EDC) to a strategic investor. And Egyptian Linear Alkyl Benzene (Elab) will be listed on the EGX this month.
The sale of state-owned assets is needed to bring in hard currency and support balance of payments needs and the budget. In the meantime, the government is trying to preserve hard currency by cutting its use. Prepaid cards not tied to bank accounts have been stopped from making foreign purchases. Discussions are also underway to offer dollar certificates of deposits to foreigners and Egyptians living abroad at attractive rates in order to attract hard currency. Banking consultant Gamal Wagdi argues it is a good idea because it distributes risk and could be cheaper than sovereign borrowing from international markets.
Also in the pipeline are Panda bonds which will diversify funding options for infrastructure projects and government services and reduce the cost of debt, according to Hanafi.
To support Egypt’s financing needs, the African Development Bank Group (AfDB) approved a partial credit guarantee of $345 million in Chinese Renminbi to enable Egypt to issue its planned $ 500 million Panda bonds. AfDB’s credit guarantee came after several credit rating agencies downgraded Egypt’s sovereign rating, placing limitations on its ability to attract bond investors at appropriate cost, explained Hanafi. The bank’s guarantee will give Egypt a push in the Chinese bond market and will serve as a gateway for more favorable financing for the Egyptian economy.
Metwalli believes the benefits of the Panda bond deal include diversifying funding sources, accessing a large investor base, improving investor confidence, enhancing bilateral relations with China and increasing economic visibility and recognition in the East. The deal is part of ongoing efforts to reduce Egypt’s reliance on Western investors and attract more investors from Asia.
The consensus among banks and research firms, according to Metwalli, suggests that the government will eventually attract foreign currency inflows through either a further currency devaluation by 5-10 per cent and/or the sale of assets. However, if strategic investors from the Gulf show inflexibility in negotiations, a more aggressive strategy on asset sales will be required to attract other investors, including East Asians.
To maintain competitiveness in the region, Egypt must prioritise establishing clear communication channels with investors, argues Metwalli. It will need to expedite the implementation of improved regulations, including the national intellectual property strategy and the national anti-corruption strategy, to enhance the investment climate, which Metwalli says “will not only stimulate immediate private investment but pave the way for growth for decades to come”.
* A version of this article appears in print in the 8 June, 2023 edition of Al-Ahram Weekly