JPMorgan is the latest investment bank to warn of the consequences of delaying reform: Further delays to currency and structural reforms will ramp up liquidity pressures and raise questions about the sustainability of Egypt’s debt, analysts at JPMorgan wrote in a note last week. The investment bank said that while a near-term default isn’t in the cards, the recent sell-off in Egyptian bonds indicates growing anxiety about the medium-term outlook, especially with the heavy debt repayment schedule over the coming years.

The good news:The bulge bracket stalwart thinks Egypt should be able to seal a staff-level agreement with the IMF next month, putting us on course to getting board approval and the next loan tranche by the third quarter. Each review requires Egypt and the IMF to reach a staff-level agreement, which is then taken to the executive board for approval.

Remember: Egypt committed to maintaining a flexible exchange rate and undertake a host of structural reforms — including selling down state assets and improving transparency of state- and military-owned companies — as part of its USD 3 bn agreement with the IMF. Following a sizeable depreciation during the first two months of the year, the official EGP-USD exchange rate has remained unchanged, while the government is yet to make a sale under its ambitious privatization program.

What they said: “Efforts are needed to catalyze privatization flows as their continued absence will further worsen the country’s external picture and aggravate imbalances,” the analysts wrote.

There are three ways that JPMorgan thinks this could play out:

#1- Summertime, and the living is easy: We reach a staff-level agreement with the IMF by June, paving the way to the executive board approving the review and the disbursement of the next loan tranche, no questions asked. In this scenario — to which the bank gives a 55% probability — Egypt will see FX reserves rise USD 3.2 bn both this fiscal year and the next, and trigger another USD 3.1 bn in inflows from multilateral lenders.

#2- We’ll take it: We reach a staff-level agreement with the Fund but the executive board isn’t convinced. Before signing off on the review, it asks us to push on with the reform agenda, such as selling down more state-owned assets. JPMorgan says that in this scenario — which it gives a 30% likelihood — bond prices could decline initially but won’t experience dramatic changes.

#3- Hold onto your hats: Having failed to reach a staff-level agreement with the Fund in June, there remain few signs of a breakthrough in the third-quarter. In this “more dire” scenario, the bank expects FX reserves to decline by almost USD 10 bn over the next two fiscal years and bond prices could move towards default territory. JPMorgan currently gives this only a 15% chance of happening.

Tags: