It’s official, everyone: You may now breathe. The EGP is now floating after the CBE said in a statement (pdf) this morning that it would “allow the exchange rate to be determined by market forces.” The pledge came as the bank announced its Monetary Policy Committee had held a special meeting at which members decided to hike key policy rates by 600 bps.

The central bank effectively allowed a period of price discovery in the interbank market that saw the EGP weaken to 50.70 to the greenback before settling at 49.60 at dispatch time this afternoon.

The impact was immediate: Along with our UAE team, a number of us are in Dubai this week for the EFG Hermes One on One, and the change in atmosphere here was immediate.

Early signs suggest investor confidence is returning. Officials and pundits alike have claimed for months (or more) that the resolution of the FX crunch would come down to how quickly and decisively the central bank can restore confidence in the exchange rate. Investors like our fundamentals — they but don’t trust that they can (a) transact without taking a haircut or (b) be able to repatriate their funds, be they dividends or proceeds from the sale of an investment. Egyptian corporates in Dubai today report higher quality meetings with much more engaged investors.

Separately, one of the nation’s most senior bankers tells us that his team has had “inquiries from investors in London and New York” and bought USD from investors today.

Is this a real float? “Absolutely,” said one senior Western diplomat with knowledge of the talks between the IMF, Hassan Abdalla’s central bank, and the Madbouly government. “This is what was agreed with the IMF, which will be watching throughout the duration of the program. They have three indicators they’ll be keeping an eye on: The existence and size of the black market spread, the trading volume in the interbank market, and the size of the FX backlog.”

Can the CBE intervene in the market? “No,” says the diplomat. “But that doesn’t mean that the CBE cannot provide liquidity. That’s legitimate. What they cannot do is what they’ve done in past years, which is telling banks at which rate to trade or forbidding trade altogether as has been the case since early 2022.”

Can we breathe now? Maybe. “It’s very early hours, but judging by the signals we’ve seen so far, we’re very encouraged, particularly by the rate hike. It’s much higher than we expected in the immediate wake of the Ras El Hekma transaction,” our friend Mohamed Abu Basha, managing director and head of macroeconomic analysis at EFG Hermes, told us this afternoon in Dubai.

“The concern was that Ras El Hekma might have diverted policymakers from doing the right thing, but the optics today are telling: They moved on interest rates and they moved on the currency. That’s the big message today: They’re really addressing the tough questions they needed to tackle,” he said.

“It’s a mega-announcement,” Abu Basha added. “The rate hike, the move on the currency, the press conference with the IMF to announce a staff-level agreement. When all of that happens in a single day, it’s designed to send a big message. It shows policymakers knew they needed to make a big move despite the ADQ announcement two weeks ago.”

THE NEW “NEW NORMAL” FOR THE EGP-

Where does the EGP currently stand? One USD was changing hands at EGP 49.6 (CIB’s sell rate). Until this morning, the FX rate had been trading at EGP 30.96 / USD 1 since early last year.

Is this an overshoot? An overshoot isn’t uncommon and it could take “a few days or weeks for the exchange rate to stabilize around its new equilibrium level,” Societe Generale EM strategist Gergely Urmossy told Bloomberg. HSBC’s Simon Williams has penciled in EGP 40-45 for the EGP against the USD, while CIB Chairman Hisham Ezz Al-Arab puts it at EGP 43.00, CNBC Arabia quotes him as having said.

WHERE DO THINGS STAND WITH THE IMF?

We’re expecting an announcement of a staff-level agreement with the IMF this evening, when Prime Minister Moustafa Madbouly will ink the agreement and hold a press conference with the IMF, a top government source told Enterprise.The IMF’s Executive Board isn’t scheduled to hold a meeting on Egypt before the end of March, a senior Western diplomat told Enterprise.

Expect to hear from Abdallah, too: CBE Governor Hassan Abdallah is scheduled to hold a presser at 6:30pm, our sources tell us. It remains unclear what’s on his agenda at the presser — we’re expecting a joint Madbouly-Abdallah appearance with the IMF — but be on the lookout for a clear message that the EGP is now floating freely and that the bank will move over time to ease restrictions on the use of foreign currency.

A USD 8 bn IMF facility? Nobody is saying what size facility to expect, but word in Cairo is that we’re looking at about USD 8 bn. Authorities have previously said they were looking at something in the USD 8-10 bn.

OF RATES, CDs, AND CREDIT CARDS-

Where do rates stand? The overnight deposit rate now stands at 27.25%, and the lending rate is 28.25%, while the main operation and disc. rates are at 27.75%. The central bank last raised rates in February, when it moved ahead with a 200 bps hike.

Fresh high-interest CDs are on the market: State-owned Banque Misr (pdf) and National Bank of Egypt have rolled out high-interest certificates of deposit. The three-year CDs carry a declining rate, offering buyers an annual payment of 30% for the first year, 25% for the second year, and 20% for the third year, or a quarterly or monthly payouts at reduced annual rates. Quarterly payouts start at a 27% annual rate, declining 400 bps each year, while monthly payouts start at 26% and decline 350 bps each year.

It’s going to be easier to use your credit cards for foreign-currency transactions: The CBE has directed local banks to ease limits on foreign-currency transactions, a senior banker tells us. The central bank is leaving each institution to ease restrictions at its own pace, but the message is clear: We need to start returning to normal after months of tight limits that have sent businesses, travelers, and subscribers to tech and streaming services scrambling.

The CBE is also allowing banks to ease curbs on the use of EGP credit cards for FCY-transactions in Egypt. It remains unclear when it will scrap limits on the use of EGP debit cards abroad.

IMPORTERS CAN START BREATHING, TOO-

Importers of strategic and critical goods should see relief first, one of the nation’s most senior private-sector bankers tell us. “We will prioritize importers of food, medicine and the like — the idea is to get critical stuff out of ports as soon as possible and then move on to production inputs and everything else in the backlog.”

Estimates of the size of the backlog vary wildly depending on who you talk with, but we think it’s in the range of USD 6-8 bn when you exclude duplicate orders and other distortions. Prime Minister Moustafa Madbouly has taken a personal interest in the customs file, according to Extra News, and is following up on the pace at which goods are being released from port.

PORTFOLIO INVESTORS ARE COMING BACK-

Officials expect to see the return of foreign appetite for Egyptian debt after the unprecedented jumbo 600 bps rate hike, a government source told Enterprise. Officials believe a 30% yield should be sufficient to bring foreign investors back, citing conversations in recent days with institutional investors.

But it’s going to cost us: The government’s debt service burden is going to jump about 8% by 2H 2024, to range between EGP 800 bn to EGP 1 tn, a Finance Ministry source tells us.

Subsidies are going to cost the state more, too: Egypt’s basic commodity budget will be recalculated to factor the new cost of food subsidies in the wake of the float, the source added.

And that means consumer prices are going up: The government’s fuel pricing committee could meet today or tomorrow and raise fuel prices by more than 10%, Cairo Capital Securities Chief Economist Hany Genena told Al Arabiya Business.

…but not as much as many fear: “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, HSBC’s Williams told us yesterday.

MARKET REAX-

The EGX30 was down 3% at today’s close, ending the day in the red after rising as much as 5% in intraday trading before paring back its gains.

Why is the EGX down? Many investors had bought into equities as a hedge against an EGP worth 65 or more to the greenback. This is investors taking profits. The key thing to remember: The EGX30 just got much more attractive in USD terms to foreign portfolio investors.

Bonds soar: Egypt’s USD-denominated debt — especially longer-dated bonds— surged on thenews, with those maturing in 2047 gaining 3.5 cents, narrowing the yield spread between Egyptian USD bonds and US treasuries.

?️ TOMORROW’S WEATHER- Look out for a cloudy day starting off with a low of 13°C before creeping up to 22°C then dropping down to 16°C at night, according to our favorite weather app.