Another round of IMF talks is underway: Representatives from the IMF, led by themission chief for Egypt Ivanna Hollar, are in town to discuss the two long-stalled reviews of Egypt’s loan program, an IMF spokesperson told Reuters on Friday. The visit comes on the heels of IMF Mideast and Central Asia head Jihad Azour’s trip to Cairo, where he met with Egyptian authorities and “regional stakeholders,” the spokesperson added. Updates and outcomes will follow the end of Hollar’s visit, the spokesperson added.

What’s on the agenda? Cabinet spokesperson Mohamed El Homsani had mentioned earlier this month that IMF officials are likely to pay Egypt a visit in January to finalize the timeframe for the Fund’s new loan to the country. Asharq Business also reported yesterday, citing people it says attended the meetings, that Sovereign Fund of Egypt head Ayman Soliman, and Planning Minister Hala El Said held hours-long talks with the IMF team, briefing them on the state’s structural reform program and other economic performance indicators.

Remember: The IMF postponed reviews scheduled for March and September of 2023 afterauthorities failed to meet several conditions of the facility. Unlocking the remainder of the facility is contingent on the reviews happening — the first and second reviews should release almost USD 700 mn. The Fund will need to sign off on the two reviews before any announcement is made about potentially topping up the loan.

What are the conditions? The Fund wants Egypt to fulfill key policy requirements — includingtighter fiscal and monetary policy, and moving towards a flexible exchange rate — before signing off on the first two reviews, the Fund’s communications head Julie Kozack reiterated last week.

We’ve seen mounting signs of a larger package: Kozack said that a larger package would be“critical” for the success of Egypt’s loan, amid the growing strain on the economy triggered by Israel’s war on Gaza and its impact on tourism and Red Sea trade movement. IMF Managing Director Kristalina Georgieva said in November that the Fund was “seriously considering” increasing Egypt’s USD 3 bn loan program.

How much are we talking? Talk show host Lamees El Hadidi told viewers that she was told by unnamed sources that the authorities are in talks with the Fund over potentially raising the value of the loan to USD 10-12 bn, up from the USD 3 bn originally pencilled in by the Fund. Previous unconfirmed reports in October said that the government was looking boost its loan to USD 5 bn.

What’s next? The IMF delegation is also expected to hold meetings with the ministries of transport, oil, and finance along with the Central Bank of Egypt and other institutions in the next few days, according to the outlet.

MOODY’S DOWNGRADES EGYPT’S CREDIT OUTLOOK-

IMF progress is not enough to remedy Egypt’s credit outlook:Moody’s hasdowngraded Egypt’s credit outlook to negative from stable, affirming its Caa1 rating — seven rungs into junk territory — the credit rating agency wrote on Thursday. The agency cites concerns that IMF support may be insufficient to ward off macroeconomic challenges and currency instability in the country.

Foreign debt will weigh more heavily as the EGP depreciates in value: Interest payments are expected to burn up to two thirds of the government’s revenues by the end of fiscal year 2023-2024 due to the widening gap between the official USD-EGP exchange rate and the parallel market rate, the report noted. “While a debt restructuring in the near term is not Moody’s current baseline expectation, the risks have increased,” it added.

It seems Lamees Al Hadidi isn’t the only one predicting a larger package: “Moody’s assigns a high likelihood to a program enhancement to up to USD 10 bn from the previously approved USD 3 bn,” Moody’s said.

ICYMI: Moody’s last downgraded Egypt’s sovereign credit rating in October on the back ofworsening debt affordability and the impact of the FX crunch on the state’s ability to meet repayments. Moody’s cut Egypt’s rating to Caa1 with a stable outlook from B3.

FinMin reax: The government is working “with extreme caution” to manage the risks of geopolitical tension and successive economic headwinds, the Finance Ministry said on Friday, adding that Moody’s outlook did not take into account the state privatization program, which is expected to reduce the need for external financing for the coming two years.

EGP WATCH: The EGP weakened to a record low against the greenback in the parallel marketover the weekend, with local media reporting that the currency is changing hands at more than EGP 60.0 per USD, almost double the official exchange rate of EGP 30.96.

But remember, the usual caveats apply: The parallel market is by definition thin and opaque, making it difficult to figure out what a fair value is. The exchange rate on the parallel market depends on where you are, who you are, and what you’re buying.

The war on Gaza is partially to blame, hurting our already dwindling FX reserves. The warhas delayed the resumption of Egypt’s LNG exports, which were already on hold due to a long summer heatwave and declining local production, meanwhile disruptions to the Red Sea trade movement has halted much of the traffic passing through the Suez Canal, causing revenues from the canal since the beginning of the year to decline 40% y-o-y.

The international press also has the story:Bloomberg

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