Egypt, IMF and inflation shock for comman man

Dubai - $12 billion IMF loan is a game-changer

Foreign loans have been anathema to Egypt's political elite ever since Britain shelled Alexandria with its naval fleet and colonized the Suez Canal Zone to collect Khedive Ismail's debts to London merchant banks and "IMF bread" riots forced Anwar Sadat to go to Jerusalem in a quest for American diplomatic mediation to help Israel withdraw from the Sinai Peninsula.
Egypt has paid a steep financial price for its $12 billion IMF loan. Egypt devalued the pound by 40 per cent and let it trade freely in a "free float" regime, raised $6 billion from Gulf donors, imposed a value added tax (VAT) and slashed energy subsidies, despite double-digit inflation.
The Arab world's most populous nation, with 90 million citizens, has at least 20 million people below the extreme line of poverty who survive on $2 a day. I have seen the glitziest hotel resorts in Sharm el-Sheikh and the mansions of the pre-Nasser Pashas in Zamalek. I have also seen the desperate poverty in the Cairo suburb of Imbaba. The last five years have been an economic nightmare for Egypt's poor and middle classes.
Egypt's financial lifeline was the $30 billion in aid given by Saudi Arabia, Abu Dhabi and Kuwait in the past five years. Yet this scale of financial aid could not continue indefinitely due to the oil crash. So Egypt was forced into the embrace of the IMF after a chronic dollar shortage and a spike in inflation that has led to hoarding of sugar, rice and medicine. The oil crash has also impacted Suez Canal shipping tolls and remittances from Egyptian workers in the Arabian Gulf.
The $12 billion IMF loan, the biggest ever granted to a sovereign borrower in the Middle East, is a game changer. The Finance Ministry expects $8-10 billion in portfolio flows in the Egyptian Treasury bill market and the Cairo Alexandria Stock Exchange (CASE). The Egyptian pound, which has sunk to 17.5 is easily Africa's most undervalued currency, more attractive than both the Nigerian naira and the South African rand.
The 50 per cent devaluation of the Egyptian pound means inflation shock, as the rate was 15 per cent even before the Central Bank of Egypt (CBE) liberalised the exchange rate regime. The protracted oil slump in the GCC will also hit remittances, the largest source of current account inflows at a time when the current account deficit could well be $20 billion.
The pound devaluation and the $12 billion IMF loan is a potential vote of confidence in Egypt and the EGX30 stock market index has sealed 10,000 for the first time since 2008. The 300 basis-point rate hike has also stimulated international investor interest in Egypt's local currency government debt market. The currency devaluation should also help Egypt's exports and tourism, 10 per cent of GDP but in a depressed state since ISIS blew up a Russian jet full of tourists in the skies above Sinai. It is entirely possible that the scale of Egypt's macroeconomic adjustment, the psychological ballast of the IMF loan, the bull run in the stock markets, higher trading volumes in Treasury Bills will attract remittances into the banking system. In this case, I would not be surprised to see an appreciation in the Egyptian pound to 13.
The economic stakes could not be higher for the El Sisi government and Central bank governor Tarek Amer. If the Egyptian pound falls below the pre devaluation black market rate of 18 to the US dollar, inflation will go ballistic and the central bank will be forced to impose capital controls ending Egypt's appeal for international investors. This would defeat the purpose of the November flotation and deal a death blow to business confidence in Egypt - and trigger "IMF bread riots". This is the last thing President El Sisi, the IMF, the World Bank and the Egyptian people need.
It is imperative that the World Bank increase its $400 million loan program for the Karama social safety net program that help millions of impoverished Egyptian families. The Egyptian pound is a compelling buy at 17 for a 14 target, albeit with tight stops as this is still a high risk emerging market forex idea.
The writer is a global equities strategist and fund manager.