Egypt takes steps to hedge against devastating liquidity shock

By Sherif Tarek
Posted on Wednesday, 30 March 2022 19:40, updated on Thursday, 31 March 2022 00:24

Egypt's President Abdel Fattah al-Sisi
Rising inflation clouds prospects for African leaders including Egypt's President Abdel Fattah al-Sisi. (Johanna Geron, Pool Photo via AP)

As war kills tourism and bumps inflation, the Egyptian government is in talks with the IMF over a new deal. On the agenda? Maintaining a flexible exchange rate, retreating from public investment while making way for the private sector, and accelerating an IPO programme.

After introducing a number of fiscal measures this month to cushion consecutive economic shocks, Egypt is now seeking to secure its fourth IMF agreement in less than six years and hopes to offload stakes in major state-owned companies in an effort to avoid a currency crisis.

In February, Egypt’s urban inflation jumped to 8.8%, its highest in almost three years, and which is forecasted to reach double digits due to rising wheat and oil prices following Russia’s invasion of Ukraine.

The war has also cut short the recovery of tourism and exacerbated portfolio investment outflows from Egypt. Both are key sources of hard currency, which the country needs to pay foreign debt obligations, buy basic foodstuffs, and stabilise the exchange rate.

Rate hikes

As recommended by investment banks, to dissuade non-resident portfolio investors from exiting the market, the Central Bank of Egypt (CBE) has devalued the local currency by over 15% to trade at over 18.30 to the dollar, and hiked benchmark interest rates by 100 basis points. After the hike, the overnight lending and deposit rate were 10.25% and 9.25% respectively.

More rate hikes are expected in order to tame spiralling consumer prices, which will further spike during Ramadan, which begins 2 April when there is usually higher demand for food products.

Continued exchange rate flexibility will be essential to absorb external shocks and safeguard financial buffers during this uncertain time.

Meanwhile, the National Bank of Egypt and Banque Misr, the country’s largest two state-owned banks, also launched local currency certificates of deposits with an interest rate of 18% to support the local currency.  The certificates raised LE226bn ($12.32bn) within one week for certificate holders.

Resorting to IMF

“Continued exchange rate flexibility will be essential to absorb external shocks and safeguard financial buffers during this uncertain time,” the IMF said in a statement issued on 23 March. “Prudent fiscal and monetary policies will also be needed to preserve macroeconomic stability.”

The EGP devaluation and expansion of social protections – most notably through a LE130bn ($7bn) stimulus package that will introduce tax incentives and increase social safety measures, including capping unsubsidised bread prices – were deemed as “welcome steps” by the IMF.

With more needed to stem the tide, Egyptian authorities have requested fresh IMF support. Egypt premier Mostafa Madboubly later said a new deal with the fund may involve another loan, without specifying its worth.

In 2016, Egypt signed a $12bn deal with the IMF that entailed radical economic reforms, including a sharp currency floatation and the gradual phasing out of subsidies. After being hit by the pandemic, Egypt reached an agreement with the fund to secure Rapid Financing Facility and Stand-by Arrangement, both amounting to around $8bn in 2020.

Expected new measures

Speaking to The Africa Report, Mona Bedeir, a senior economist at Prime Holding, a Cairo-based investment bank, underscored three areas in which a new agreement with the IMF is likely to bring about changes:

  • Monetary policy: The CBE will maintain a flexible exchange rate, and should revise the 5%-9% inflation target range, Bedeir says, which she expects to happen after talks with the fund are concluded.
  • Public investment: The government will need to either give way to the private sector or forge public-private partnerships for different public investments. The State needs to cut expenditures to avoid being steeply indebted, especially while relying on short-term debt instruments these days. This, Bedeir says, paves the way for the private sector to invest in certain strategic areas such as building silos, water desalination and green hydrogen. According to a source familiar with the matter, the government is already ceasing to invest in such projects and primarily channelling funds into social support initiatives.
  • IPO programme: The government ought to expedite its offering programme, whether IPOs or secondary offerings. The program started with the floating of a 4.5% stake in tobacco monopoly Eastern Company in March 2019. It was resumed after a 2.5-year hiatus following the listing of a 26.1% stake in fintech giant e-finance last October. The programme aims to list over 20 company stakes on the Egyptian Exchange as privatisation of state-controlled enterprises is one of the IMF’s traditional focal points.

UAE steps up acquisitions

For more liquidity, the government will also sell five key stakes in already listed companies to Abu Dhabi wealth fund, ADQ, as part of a roughly $2bn investment.

This month, Bloomberg reported that ADQ will buy stakes in state companies Abou Kir Fertilisers & Chemical Industries, Misr Fertilisers Production Co., and Alexandria Container & Cargo Handling Co.

ADQ is also buying government-owned stakes in Fawry for Banking & Payment Technology Services and Commercial International Bank (CIB), Egypt’s largest private lender. The stake in the latter amounts to 18%, according to Bloomberg.

The potential acquisitions will be part of much-needed capital inflows that would alleviate pressure on the Egyptian pound while “foreign currency inflows through other channels, such as local debt instruments have been greatly affected,” says Bedeir.

Earlier in February, First Abu Dhabi Bank PJSC offered to buy a majority stake in EFG Hermes, valuing Egypt’s largest investment bank at $1.2bn.

In May last year, First Abu Dhabi Bank (FAB) completed the acquisition of a 100% stake in Bank Audi Egypt, and a consortium of Aldar Ventures International Holdings RSC Limited and Gamma Forge Limited acquired 85.5% of Egyptian real estate developer SODIC later in December.

Slightly further afield, the Egyptian cabinet announced an agreement on Tuesday 29 March with Qatar over investments and partnerships in Egypt worth $5bn, which might prove a lifeline given the current economic issues. Both countries restored ties in January 2021, ending tensions that erupted after the toppling of late Egyptian Islamist president Mohamed Morsi in 2013.

Political support or commercial decision?

The increasing acquisitions of Egyptian companies by UAE entities have stoked speculation that such a trend is politically motivated to support the Egyptian regime against the increasing economic pressures. The Gulf country has been a staunch supporter of Egyptian President Abdel-Fattah el-Sisi since he came to power.

…if they [UAE buyers] did not see value and did not see [a] future growth possibility they would not have come in.

However, Mohammed Ali Yasin, chief strategy officer at Al Dhabi Capital, believes that such deals, including the coming ones, must be materialised through sound business planning. He says the Egyptian market has been becoming increasingly attractive over the past years.

“The fact they’re public companies [means] the information is there,” he tells The Africa Report. “… if they [UAE buyers] did not see value and did not see [a] future growth possibility they would not have come in.

“So I think [these] are investments based on merit rather than on just a, if you want, periodical support because of high prices or fear of inflation … it is a financial, commercial decision.”

Understand Africa's tomorrow... today

We believe that Africa is poorly represented, and badly under-estimated. Beyond the vast opportunity manifest in African markets, we highlight people who make a difference; leaders turning the tide, youth driving change, and an indefatigable business community. That is what we believe will change the continent, and that is what we report on. With hard-hitting investigations, innovative analysis and deep dives into countries and sectors, The Africa Report delivers the insight you need.

View subscription options