{"id":610193,"date":"2023-11-16T00:00:00","date_gmt":"2023-11-16T00:00:00","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/2023\/11\/16\/eu-reportedly-readying-financial-support-package-as-egp-pressures-mount\/"},"modified":"2023-11-16T00:00:00","modified_gmt":"2023-11-16T00:00:00","slug":"eu-reportedly-readying-financial-support-package-as-egp-pressures-mount","status":"publish","type":"post","link":"https:\/\/enterpriseam.com\/egypt\/2023\/11\/16\/eu-reportedly-readying-financial-support-package-as-egp-pressures-mount\/","title":{"rendered":"EU reportedly readying financial support package as EGP pressures mount"},"content":{"rendered":"

Good morning, friends. We have a big issue for you this morning<\/strong> as the workweek roars to a close.<\/p>\n

The two BIG STORIES HERE AT HOME: The European Union is said to be mulling a <\/strong>package of investment<\/strong>in Egypt that could clock in at nearly USD 10 bn <\/strong>\u2014 and that it wants to \u201cexplore options with member states to help Egypt address its heavy debt burden.\u201d That would be very welcome news indeed, possibly giving the central bank a bit of breathing room to tackle a float of the EGP as pressure builds. The greenback broke past the EGP 50 mark yesterday on the parallel market and forwards have hit a new low, as we note below. <\/p>\n

MEANWHILE: Eastern faces monopoly complaint. <\/strong>Two major cigarette distributors have filed a complaint with the Egyptian Competition Authority alleging that Eastern Company and a key shareholder have engaged in unfair competitive practices. We have that story in the news well, below.<\/p>\n

MAJOR EU ASSISTANCE PACKAGE COMING? <\/strong><\/p>\n

<\/a>WATCH THIS SPACE- Brussels is putting together a major financial <\/strong>assistance package for Egypt:<\/strong> The EU plans to marshal bns of EUR of investment for Egypt and potentially provide debt relief in some form as the bloc tries to help stabilize the economy and curb migration across the Mediterranean in the wake of the conflict in Gaza, Bloomberg<\/a> reported yesterday, citing sources familiar with the matter. <\/p>\n

The plan: The EU wants to mobilize <\/strong>EUR 9 bn of investment (USD 9.8 bn) in sectors including digital, energy, agriculture and transport<\/strong> \u2014 and hold an investment conference in spring 2024. It would also include measures to strengthen the country\u2019s border security and crack down on smuggling as part of plans for a wider strategic partnership with Egypt.<\/p>\n

This is much more ambitious than what we\u2019ve heard so far:<\/strong> Sparse details reported by the Financial Times last month claimed that the bloc was looking to fund job creation<\/a> and the green transition, as well as provide access to more Ukrainian grain and fertilizers.<\/p>\n

VdL will be in Cairo this weekend:<\/strong> EU Commission President Ursula von der Leyen will visit Cairo for talks with President Abdel Fattah El Sisi on Saturday, her spokesperson, Eric Mamer, said<\/a> yesterday. Mamer didn\u2019t get into what\u2019s on the agenda, though Bloomberg\u2019s sources suggested that the rescue package will be a key focus of the talks. VdL will head to Jordan to meet with King Abdullah following the meeting.<\/p>\n

The key line:<\/strong> \u201cThe EU was already exploring a partnership but now wants to accelerate the push given Cairo\u2019s strategic significance and concerns about increasing refugee flows,\u201d Bloomberg writes. The story was reported by the business information service\u2019s Brussels bureau.<\/p>\n

BNS MORE FROM AFREXIMBANK?<\/strong><\/p>\n

<\/a> A lot more Afreximbank funding could also be in the works: <\/strong>The continental lender is looking to extend USD 11 bn in credit facilities to a number of Egyptian companies, the bank\u2019s director of trade and corporate finance Ayman El Zoghby told CNBC Arabia<\/a> yesterday. Afreximbank inked 65 agreements worth a combined USD 40 bn during this week\u2019s Intra-African Trade Fair<\/a> in Cairo, USD 3 bn<\/a> of which went to projects led by Egyptian corporates. The bank is also looking to set up its own freezone in Egypt and aims to finish up the necessary paperwork during 1Q 2024. <\/p>\n

MOUNTING PRESSURE ON THE EGP<\/strong><\/p>\n

EGP WATCH- Pressure continued to build on the EGP in the parallel and <\/strong>derivatives markets yesterday<\/strong>, raising pressure on policymakers to move ahead with a true float of the currency.<\/p>\n

<\/a> #1- The USD \/ EGP breaks the 50.0 barrier in the parallel market:<\/strong> The EGP weakened to a record low against the greenback in the parallel market yesterday. Local media reported the currency changing hands at more than 50.0 per USD yesterday, more than 60% below the official exchange rate of 30.9.<\/p>\n

#2- Currency forwards hit a fresh record low:<\/strong> Non-deliverable forwards (NDF) contracts have fallen to a record low since the war in Gaza began last month. The three-month EGP contract is down 14% over the period to 37.7 and the 12-month NDF has slid 11% since late September to 47.0, Bloomberg<\/a> reports. <\/p>\n

How to think about the gap between forwards and the parallel market. <\/strong>In a nutshell: Black market = our current mental state. Forwards = future direction of travel. Forwards often miss the mark, but the market for them is a lot more liquid \u2014 and a vastly more transparent \u2014 than the parallel market. The parallel market is disproportionately influenced by the sentiment of individual sellers rather than by corporates making (comparatively) large purchases to cover L\/Cs and transfers. <\/p>\n

Retail sentiment matters: <\/strong>The greenback was already changing hands at EGP 40-41 in the parallel market \u2014 30% lower than the official rate \u2014 in the middle of October, but the CBE\u2019s decision<\/a> to impose restrictions on credit card use triggered a rush out of the EGP. Within a week, the exchange rate had weakened to 48.00<\/a> from 42.00. It has since slid further due to anxiety about the impact of the war on the Egyptian economy.<\/p>\n

#3- The gap between CIB\u2019s London- and Egypt-listed securities is widening:<\/strong> CIB\u2019s London-listed depository receipts are now trading at a 46% discount to the bank\u2019s shares on the EGX, the widest the gap has been since 1997.<\/p>\n

Analysts are split over how soon after next month\u2019s election the central bank will <\/strong>float<\/strong> the <\/strong>currency:<\/strong> Analysts at Societe Generale think the central bank could move soon after the presidential election, while Deutsche Bank and Morgan Stanley are forecasting a move in the first quarter of 2024, according to Bloomberg.<\/p>\n

The sooner the better:<\/strong> \u201cThe later authorities adjust the valuation of the currency, the more they\u2019ll need to do. Time is certainly against them,\u201d SocGen emerging markets strategist Gergely Urmossy told Bloomberg.<\/p>\n

Bloomberg is now factoring in Egypt\u2019s refusal to take in Palestinian refugees into its <\/strong>outlook: <\/strong>\u201cAdding to the negative outlook, hopes are fading that Egypt will quickly receive any meaningful financial assistance related to its role in supporting Palestinians fleeing Israel\u2019s bombardment of the Gaza Strip,\u201d it writes.<\/p>\n

DATA POINT- <\/strong><\/p>\n

<\/a> Read the latest budget figures through your fingers (or not at all):<\/strong> Sharply higher borrowing costs mean that the Finance Ministry\u2019s latest fiscal report (pdf)<\/a> isn\u2019t exactly light reading material.<\/p>\n