{"id":616554,"date":"2024-03-07T00:00:00","date_gmt":"2024-03-07T00:00:00","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/2024\/03\/07\/its-morning-again-in-egypt-sentiment-can-turn-on-a-dime-and-thats-what-happened-yesterday\/"},"modified":"2024-03-07T00:00:00","modified_gmt":"2024-03-07T00:00:00","slug":"its-morning-again-in-egypt-sentiment-can-turn-on-a-dime-and-thats-what-happened-yesterday","status":"publish","type":"post","link":"https:\/\/enterpriseam.com\/egypt\/2024\/03\/07\/its-morning-again-in-egypt-sentiment-can-turn-on-a-dime-and-thats-what-happened-yesterday\/","title":{"rendered":"It\u2019s morning again in Egypt: Sentiment can turn on a dime, and that\u2019s what happened yesterday"},"content":{"rendered":"

It\u2019s morning again in Egypt <\/strong>\u2014 we mean that literally, but also figuratively, in the same way that (forgive us the analogy) Ronald Reagan\u2019s campaign team meant it with its famous 1984 campaign ad. Simply put:<\/p>\n

Yesterday\u2019s bold policy moves and clear statements by officials leave us more optimistic <\/strong>about the economy\u2019s direction of travel than we have been in four very long years. Remember the \u201cDragon Storm\u201d that portended the start of covid-19 and, with it, the crisis from which we now seem to be emerging? The four-year anniversary is in just five days\u2019 time. <\/p>\n

<\/a> Central Bank Governor Hassan Abdalla spoke for us all when he said yesterday that <\/strong>having two exchange rates is a \u201cdisease that throws things out of balance\u201d <\/strong>and that much of what we\u2019ve seen in the past four years has reflected a \u201clack of confidence\u201d in the EGP (watch, runtime 12:27<\/a>). <\/p>\n

Yesterday\u2019s moves were exactly what the doctor ordered, suggesting policymakers are <\/strong>serious about restoring confidence. <\/strong>We have avoided the scenario many had feared: That the Ras El Hekma investment would provide short-term cover for policy inaction. <\/p>\n

It is too early for unbridled optimism<\/strong>, but after a long period of slumber, we took explosive steps out of the starting blocks yesterday. The big challenge for all of us now \u2014 whether we\u2019re leading companies or governments \u2014 is to deliver policy stability while remaining flexible in the face of outside shocks. <\/p>\n

But you know what? It\u2019s okay to feel good this morning. <\/strong><\/p>\n

^^ We have the full rundown on everything in this morning\u2019s news well, below.<\/p>\n

BUT FIRST- Here\u2019s the recap of what went down and how many in our community are feeling now:<\/strong><\/p>\n

#1- The Central Bank of Egypt\u2019s decision to allow the EGP to float was the key that <\/strong>unlocked it all.<\/strong> And if it (so far) feels real, that\u2019s because it is, senior bankers, government officials, and diplomats tell us. After a period of bid-and-ask price discovery throughout the morning yesterday, banks bought and sold real volumes on the interbank market in the afternoon. <\/p>\n

#2- A jumbo-sized, 600 bps interest rate hike <\/strong>and the rollout of new, high-interest CDs to sop up liquidity are probably just what the doctor ordered. A senior Finance Ministry official tells us that a 30% or higher return on t-bills is squarely in the range that they\u2019ve been told by foreign institutions would bring them back. The CEO at one of the nation\u2019s most visible private-sector banks tells us they bought USD from investors outside Egypt yesterday. <\/p>\n

The key now: How quickly can we move to a series of rate cuts<\/strong> that will bring borrowing costs under control for the government and corporates alike. <\/p>\n

WATCH THIS SPACE- The central bank will sell <\/strong>EGP 110 bn worth of t-bills<\/a><\/strong> between today and Sunday. <\/strong><\/p>\n

<\/a> #3- The IMF handed us a lifeline that could be worth as much as USD 9.2 bn<\/strong>, including USD 8 bn in an extended fund facility covered under the staff-level agreement inked yesterday and, possibly, another USD 1-1.2 bn in climate finance from the lender \u2014 talks on the latter are still in progress. <\/p>\n

More important are the policy reforms <\/strong>for which we\u2019ve signed up as a condition of the agreement, which brings us to:<\/p>\n

#4- The IMF is going to be watching closely to make sure we stay the course<\/strong>, saying it will be monitoring our \u201cmove to a flexible exchange rate system, tightening of monetary and fiscal policies, and a slowdown in infrastructure spending\u201d all with a view to \u201creducing inflation, and preserve debt sustainability, while fostering an environment that enables private sector activity.\u201d We hope they\u2019re vocal and public if they see signs of deviation.<\/p>\n

<\/a> #5- There are very clear statements from officials including Prime Minister Moustafa <\/strong>Madbouly, Abdalla, and Finance Minister Mohamed Maait <\/strong>that officials know we went off-track \u2014 and that we\u2019re committed to setting things right. The drumbeat will continue today: <\/strong>Maait has briefed G7 ambassadors and sought their support and will appear this afternoon at the American Chamber of Commerce in Egypt. He\u2019s also planning to make the rounds of other business associations and international chambers to talk about where we go from here. <\/p>\n

#6- Importers of essential goods are getting allocations <\/strong>that are allowing them to move goods out of ports. Food and medicine are at the top of the list, we\u2019re told, but the hope is that folks with production inputs in port are next. The emphasis at one of the nation\u2019s largest banks, we\u2019re told, will be to \u201callocate as much as possible to as many clients as possible to make it clear: There\u2019s money moving into the system.\u201d<\/p>\n

<\/a> #7- Credit card restrictions are easing <\/strong>after the central bank left it to each lender\u2019s discretion how fast they let go of controls imposed over the past four years of crisis.<\/p>\n

#8- Foreign appetite for Egypt is starting to return. <\/strong>Investors in the UAE yesterday had more appetite for the Egypt story than at any time in the past four years. True, that\u2019s not a high bar, but the interest was palpable. And our friends at multiple banks and investment banks are getting calls from investors in London, New York, and Frankfurt asking questions as they plan strategy. <\/p>\n

But we need to be realistic: <\/strong>We need an extended period of policy stability if we\u2019re going to lure back foreign capital and have it stick \u2014 whether you\u2019re talking foreign portfolio investment, FDI, the carry trade, or interest in our debt. <\/p>\n

#9- We\u2019re going to be able to access debt markets again, and that\u2019s a good <\/strong>thing. <\/strong>Sentiment among the pundits is that we are now in a much better position to meet our short-term debt obligations \u2014 nail that and we can access the eurobond market again<\/strong>, making it much easier for Maait and his team to effectively manage our debt. <\/p>\n

#10- As one of the smartest people we know said yesterday: \u201cDon\u2019t be shocked if you <\/strong>see a bit of dollarization before we de-dollarize.\u201d <\/strong>After a prolonged period of scarcity, some will cling to (or try to accumulate) USD in the days ahead and only let them go when the new FX policy proves credible. <\/p>\n

#11- Expect several weeks of volatility. <\/strong>We\u2019re all adjusting to a new reality, and the coming days won\u2019t be a simple, linear journey. The key is for policymakers to stay the course and for business leaders to be level-headed as we push through the days to come. Small hiccups in the coming days don\u2019t necessarily suggest we\u2019re deviating off course, though they bear watching. <\/p>\n

#12- And because it\u2019s all about sentiment, you can expect a steady drip of <\/strong>announcements from banks and the government <\/strong>as restrictions ease and hard currency is made available. The goal: To convince holders of USD (particularly tourism and hotel operators) that it\u2019s safe to de-dollarize while sending the right signals to consumers and foreign investors alike. <\/p>\n

<\/a> #13- Will things get more expensive? <\/strong>We expect fuel price hikes and other subsidy cuts to have a transient impact on prices, but remember: The EGP is now changing hands at just under 50 to the greenback. Most goods on shelves now were priced at an implied exchange rate of something around EGP 70. As both EFG Hermes\u2019 Mohamed Abu Basha and HSBC\u2019s Simon Williams have noted \u2014 prices should cool.<\/p>\n

We need to make sure that we learn the right lessons. <\/strong>Those lessons are many, but we can boil them down to four:<\/p>\n