Egypt has the chance to turn the corner, says veteran Egypt watcher Simon Williams, HSBC’s chief economist for CEEMEA: “This is one of those rare moments of genuine opportunity. With the right policy choicesin the coming weeks and months, the economy stabilizes before year-end and recovery comes into view. The pain of the last few months has made it easy to forget what a strong underlying story Egypt still is — get conditions right, then Egypt is a 6% growth story over the medium term, driven by much higher exports of goods and services, stronger private investment, and higher FDI.”

The catch: We need to get things right in the coming weeks — and stay the course with policy stability if we want to get to the other side.

“The shift in the outlook triggered by the scale and terms of the ADQ investment is clear, but the IMF agreement is still critical. That’s partly to bring in more funding, but mostly to set a policy anchor, a policy framework that can give onshore and offshore confidence in what lies ahead. And I still think that policy shift starts with FX liberalization, higher interest rates, and fiscal tightening,” Williams tells us.

The concern among many in our community is simple: Absent a significant tightening of fiscal spending and a wholesale effort to include the private sector in the economy, we run the risk of finding ourselves having gone full circle in three to five years’ time.

“Just from the conversations I’m having, I know that interest in Egypt is currently broad and exceptionally strong,” William says. “And the volatility in market pricing tells you we’re all trying to gauge where we are in the adjustment story. A large, clearly structured IMF programme would be a powerful signal that this really is an inflection point.”

The international interest in Egypt that Williams is seeing meshes with reports from other big-name banks and analysts, who have been poking into the Egypt story with more depth and frequency in the past couple of weeks — both remotely and on the ground.

Seeing privatization through the right lens is also key, Williams says.

“Privatization was not primarily about generating USD, it was about reducing the role of the state in the economy,” he notes. “I see the new focus on public capital spending — both on and off-budget — as an effort to deliver the same thing.”

Should we expect a full float or a managed devaluation? “I don’t think a simple devaluation would be enough for anyone. It’s going to take time to rebuild confidence, and without a currency that flexes, investors who do come in will be staying close to the door.”

The first big installment of the USD 24 bn that ADX is paying for the development rights to Ras El Hekma means policymakers will likely have leverage as talks with the IMF come to a close. It goes back to the old adage that banks are happiest lending to people who have no pressing need to take on more money. But the IMF’s seal of approval on a reform program is something that most in our community would like to see.

How bad will the inflationary bump be if we float? We’ve long held that for consumers and many private-sector businesses, the new FX rate is already priced in. Williams shares our view that a float won’t be horrible for many companies (though it would obviously put pressure on the state to come up with the liquidity it needs to finance key imports).

The question today is one of availability much more than it is price — particularly with the greenback going for EGP 44-45 on the parallel market and 12-month non-deliverable forwards suggesting we’re looking at something in the 52 range a year from now.

“Unifying the FX rate at 40-45 would be an appreciation for most households and corporates,” given where the parallel market was just a few weeks ago, says Williams.

HSBC has left its outlook on the EGP unchanged, with Williams saying he expects something in the EGP 40-45 range from EGP 30.95 today.

Will we see an interest rate hike on D-Day? Williams thinks so, though he agrees there may be room for the central bank to be more modest with the hike than there was pre-Ras El Hekma, when some pundits were saying we’d need to see the central bank make a 400 bps move.

Signs Williams will be watching for after the float:

  • Will remittances return? They were down 30% year-on-yearin 2023 as Egyptians abroad held onto their cash or sent it back through parallel mechanisms.
  • Do portfolio investors move from hard currency debt to local assets? Egypt is understandably keen to avoid relying on hot money, but inflows would signal market confidence and bring liquidity.
  • Will corporates and households de-dollarize? A credible rate may see them move to lock in the appreciation of their EGP assets.
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