Egypt is going to need some USD 5 bn in FX for an orderly EGP float: That’s the conclusion of Goldman Sachs MENA economist Farouk Soussa after meeting with local policymakers, analysts, and local market players during a trip to Cairo earlier this month. “The view in Cairo is that the CBE requires a war chest of around USD 5 bn in unencumbered FX reserves which it can deploy to manage an orderly transition to a more flexible FX regime,” Farouk Soussa wrote in the note last Monday.

This is going to be “challenging”: “Given our cautious view on prospects for asset sales in the medium term, we believe it will be challenging for the authorities to accumulate sufficient FX buffers for an orderly transition to greater FX stability,” Soussa wrote.

Remember: Transitioning to a fully flexible exchange rate was a key condition of the IMF program. The Fund was due to carry out the first review in mid-March but has postponed it amid a lack of progress in meeting several of its key commitments, namely the currency float and raising bns of USD via sales of state-owned assets.

El Sisi seemed to rule out a currency float last week, telling an audience that further flexibility will not be allowed if it damages the country’s national security and its people. Authorities have devalued the currency three times in the past year, which has seen it lose almost half its value against the USD.

Where does all this leave the program? Goldman sees two paths ahead:

  • The central bank goes ahead with a currency float without a stock of FX, risking a “significant” devaluation;
  • The IMF program remains on hiatus while the Fund waits for authorities to move on the currency, “with risks to programme continuity.” Goldman doesn’t believe that the Fund will be willing to compromise on currency flexibility.

Good news / bad news: Privatization will continue but the pace will be slow. The investment bank is expecting “some asset sales” to take place over the coming weeks though says that the pace of the program will remain “modest given structural impediments.” The government is targeting generating USD 2 bn from asset sales by the end of June and has so far received around USD 153 mn from its sales of Pachin and a 10% stake in Telecom Egypt.

Muddling through: While a slower pace of the state-asset sales coupled with scarce FX might increase the risk to external creditors, Soussa believes that a “muddle-through scenario is most likely” to take place. Low commercial external debt, a willingness to pay. and a low likelihood of social instability will all lower the risks, he writes.

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