{"id":616482,"date":"2024-03-06T00:00:00","date_gmt":"2024-03-06T00:00:00","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/2024\/03\/06\/an-imf-agreement-is-key-its-not-just-about-the-money-says-hsbcs-simon-williams\/"},"modified":"2024-03-06T00:00:00","modified_gmt":"2024-03-06T00:00:00","slug":"an-imf-agreement-is-key-its-not-just-about-the-money-says-hsbcs-simon-williams","status":"publish","type":"post","link":"https:\/\/enterpriseam.com\/egypt\/2024\/03\/06\/an-imf-agreement-is-key-its-not-just-about-the-money-says-hsbcs-simon-williams\/","title":{"rendered":"An IMF agreement is key \u2014 it\u2019s not just about the money, says HSBC\u2019s Simon Williams"},"content":{"rendered":"

Egypt has the chance to turn the corner, says veteran Egypt watcher Simon <\/strong>Williams, <\/strong>HSBC\u2019s chief economist for <\/strong>CEEMEA<\/strong>: <\/strong>\u201cThis 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 \u2014 get conditions right, then Egypt is a 6% growth story over the medium term<\/strong>, driven by much higher exports of goods and services, stronger private investment, and higher FDI.\u201d<\/p>\n

The catch: We need to get things right in the coming weeks \u2014 and stay the course with <\/strong>policy stability<\/strong> if we want to get to the other side.<\/p>\n

\u201cThe shift in the outlook triggered by the scale and terms of the ADQ investment is clear, <\/strong>but the IMF <\/strong>agreement <\/strong>is still critical.<\/strong> That\u2019s 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,\u201d Williams tells us. <\/p>\n

The concern among many in our community is simple: <\/strong>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\u2019 time.<\/p>\n

\u201cJust from the conversations I\u2019m having, I know that interest in Egypt is currently broad <\/strong>and exceptionally strong<\/strong>,\u201d William says. \u201cAnd the volatility in market pricing tells you we\u2019re 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.\u201d<\/p>\n

The international interest in Egypt that Williams is seeing meshes with reports from other <\/strong>big-name banks and analysts<\/strong>, who have been poking into the Egypt story with more depth and frequency in the past couple of weeks \u2014 both remotely and on the ground.<\/p>\n

Seeing privatization through the right lens is also key<\/strong>, Williams says. <\/p>\n

\u201cPrivatization was not primarily about generating USD, it was about reducing the role of <\/strong>the state in the economy,\u201d<\/strong> he notes. \u201cI see the new focus on public capital spending \u2014 both on and off-budget \u2014 as an effort to deliver the same thing.\u201d<\/p>\n

Should we expect a full float or a managed devaluation?<\/strong> \u201cI don\u2019t think a simple devaluation would be enough for anyone. It\u2019s 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.\u201d<\/p>\n

The first big installment of the USD 24 bn that ADX is paying for the development rights <\/strong>to Ras El Hekma means policymakers will likely have leverage as talks with the IMF come to a close. <\/strong>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\u2019s seal of approval on a reform program is something that most in our community would like to see.<\/p>\n

How bad will the inflationary bump be if we float? We\u2019ve long held that for consumers <\/strong>and many private-sector businesses, the new FX rate <\/strong>is already priced in. <\/strong>Williams shares our view that a float won\u2019t 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).<\/p>\n

The question today is one of availability much more than it is price <\/strong>\u2014 particularly with the greenback going for EGP 44-45 on the parallel market and 12-month non-deliverable forwards suggesting we\u2019re looking at something in the 52 range a year from now.<\/p>\n

\u201cUnifying the FX rate at 40-45 would be an appreciation for most households and <\/strong>corporates,\u201d<\/strong> given where the parallel market was just a few weeks ago, says Williams.<\/p>\n

HSBC has left its outlook on the EGP unchanged<\/strong>, with Williams saying he expects something in the EGP 40-45 range from EGP 30.95 today. <\/p>\n

Will we see an interest rate hike on D-Day? <\/strong>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\u2019d need to see the central bank make a 400 bps move.<\/p>\n

Signs Williams will be watching for after the float:<\/strong><\/p>\n