USD / EGP exchange rate stable following latest IMF disbursement

Egypt received a USD 2.3 bn disbursement from the IMF yesterday, a senior government official told EnterpriseAM. We secured the fresh funds after passing the fifth and sixth reviews of the Extended Fund Facility and first review of the Resilience and Sustainability Facility.

MEANWHILE- The EGP held steady yesterday at around EGP 50.14 to the greenback after sliding earlier in the week following the outbreak of hostilities in the Gulf. Interbank volumes were c.USD 848 mn yesterday (up about 20% from USD 700 mn the day before). Bankers told us they had no problems meeting market demand yesterday.

Where the IMF’s money is going: The CBE will hang on to the greenbacks and give the Finance Ministry the equivalent of about USD 2 bn to support the budget and help plug the financing gap, we’re told. The remaining USD 297 mn will be earmarked to back climate and environmental sustainability projects.

That’s not all: “It’s possible that the funds arrived and were paid out immediately to settle debts, instead of supporting the exchange rate,” Al Ahly Pharos’ Hany Genena tells us, adding that up to this point, there have been no indications of speculation or unusual market activity.

Despite the timely buffer, hot money continued to leave the country. Portfolio investors have pulled about USD 2 bn out of Egypt since war broke out this past weekend, a senior banker tells us. The banker characterized outflows as “within safe limits” and said that investors should have “continued confidence in the economy” given the central bank’s handling of the crisis so far.

One banker we spoke with is worried that the combination of rising oil prices and shipping costs could soon weigh heavily on the EGP, but EG Bank board member Mohamed Abdel Aal sees the EGP settling around EGP 50 unless the war gets much worse. There’s room for the EGP to strengthen to EGP 46-48 against the greenback as things stand, but if the conflict expands and tourism and Suez Canal revenues *both* vaporize? Then all bets are off, he suggests.

War clouds budget targets

The Finance Ministry is watching like the rest of us, wondering what to do with next year’s budget. Officials are running scenarios for growth, investment, government spending, private sector investment, and the cost of purchasing goods and services, a senior government source told EnterpriseAM. The review will also account for the rising cost of debt service as the state shifts toward domestic financing and a reassessment of commercial external borrowing costs, particularly as investors demand more of Egypt in a risk-off scenario.

Higher oil prices and a weaker EGP could force the Madbouly government to boost spending on subsidies and the social safety net as well as the purchase of goods and services, our government source told us. The overall budget deficit could widen to 6-7%, up from an initial target of 4.9%, the source said.

Emergency fiscal measures

The Finance Ministry has about EGP 140 bn in a contingency fund ringfenced in this year’s budget, another source tells us, but could look to set aside more if the war stretches out.

Officials may need to face down an uptick in inflation: A 10% increase in energy prices in 2Q or 3Q would add 1 percentage point to non-food inflation, according to a report by Morgan Stanley seen by EnterpriseAM. That could put pressure on the CBE to leave interest rates on hold next month, stalling the much-anticipated easing cycle.

Officials signaled yesterday they’ll once again use the customs gate as a risk-management tool:

• Officials extended a ban on the export of select raw materials and scrap metal for one year ensure domestic manufacturers have production inputs;
• The government ordered customs officials to fast-track customs clearance at ports to keep the flow of goods moving and avoid importers racking up demurrage fees.

But it all depends on how long the war lasts

As nearly everyone we’ve spoken to this week has told us, it’s really still early to tell the long-term impacts of this war, with the situation getting worse the longer the war carries on. The more optimistic scenario, according to Morgan Stanley, is an immediate ceasefire and a diplomatic reset that would likely trigger a tightening of bond spreads by 20-30 bps and a 4-5% EGP appreciation fueled by recovering Suez Canal traffic and tourism.

The next least-bad scenario would be for the strike on Iran to remain limited, a scenario that Morgan Stanley says would drive a temporary 1-2% EGP depreciation and a 30-40 bps widening in bond spreads.

A broader strike scenario — that’s probably where we are now — would widen spreads by 70-80 bps and weaken the EGP by 3-4%, the firm says. The worst scenario would be a large-scale war that would lead spreads to blow out by over 250 bps, effectively freezing our access to the global debt market. This would lead the EGP to slide 8% or more as portfolio investors rapidly unwind positions here.

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