Barclays Research: Clouds lift for Egypt
Cairo – The focus of Egypt’s new government on macroeconomic stabilisation and prospects for renewed talks with the IMF have revived bilateral and multilateral donor funding discussions, and should act as catalyst for private capital flows. The expected resource flows, USD9-10bn in the remainder of FY 12/13, should not only help plug the external financing gap, but also should improve reserve adequacy over time and reduce pressure on the EGP.
From Alla Moubayed, Koon Chow and Andreas Kolbe, Barclays
- The focus of Egypt’s new government on macroeconomic stabilisation and prospects for renewed talks with the IMF have revived bilateral and multilateral donor funding discussions, and should act as catalyst for private capital flows. The expected resource flows, USD9-10bn in the remainder of FY 12/13, should not only help plug the external financing gap, but also should improve reserve adequacy over time and reduce pressure on the EGP.
- We expect the authorities and the IMF to agree to a floor for Net International Reserves (NIR) set at around three months of imports of goods and services, with the objective to improve reserve adequacy over time.
- We expect fiscal consolidation measures to reduce the deficit by 1.0-1.5pp of GDP to 8.7% from an estimated 10.2% last FY. A corresponding target for the cumulative deficit is likely, along with a limit on CBE financing, in our view.
- The balance of risks has, in our assessment, tilted in favour of being long EGP, and we recommend taking exposure through buying EGP via 6m USD/EGP NDFs, where the breakeven FX rate is 6.47 (implying a 12.8% yield). We feel the environment is supportive of a controlled, “grind” depreciation of 5% pa rather than a bigger step devaluation of around 10%. As such, we support taking EGP exposure.
- On the credit side, we think that Egypt ’40s currently offer the best way to express a positive view on Egypt, given the steepness of the curve in a global EM credit context. However, we do not find Egypt’s credit metrics enticing enough to recommend more than a market weight position on Egypt credit.
