The visit, planned for August 22, “is a reflection of the IMF’s continuous commitment to support Egypt and its people during this historic period of transition,” the Fund said in a statement.
Analysts say that besides the strong support from the Fund for Egypt’s efforts to reform, the visit also signals the possibility that a deal might be clinchedby the end of the year, cutting the chances of further devaluation of the Egyptian pound.
The Egyptian pound has been under pressure because of weak foreign investment and tourism revenues since President Hosni Mubarak was ousted a year and a half ago, prompting some market watchers to warn of a currency crisis as the central bank’s foreign reserves have been severely drained by attempts to keep the currency afloat.
During this time, various Egyptian governmentshave negotiated with the IMF to get emergency loans of about $3.2 billion. On Wednesday, Egyptian finance minister Mumtaz al-Saeed said, quoted by Reuters, that the amount might be increased to $4.8 billion.
The clinching of a deal has been hindered by the domestic political turmoil but once the political back-up is in place, things should go smoothly, analysts said.
“The case has always been that civil servants behind the scenes have known what to do,” Peter Attard Montalto, emerging markets economist at Nomura, told Emerging Markets. “[The IMF] are probably just going there to say ‘you know what to do, go ahead and do it.’”
“The IMF has always said they’re willing to give the money once the institutional framework is in place and that looks like it’s being done,” Montalto added.
TURNING THE TIDE?
Egypt’s president Dr. Mohamed Morsi fired two top-ranking generals last Sunday and cancelled a constitutional declaration issued by the military council in June that gave it extended powers and curtailed Morsi’s attributions.
Some analysts have said that the bold move gives the president full legislative and executive powers, since Parliament was dissolved earlier in the year; elections are likely to take place in November or December.
But it is too early to expect that Morsi’s move will set a trend, as “the military is an institution that does not rely solely on one or two individuals,” Said Hirsh, Middle East economist at Capital Economics pointed out in a market note.
Hirsh said that “the tide may finally be turning” in Egypt’s favor with Lagarde’s upcoming visit and the country’s recent deals with external funders.
Although there are no guaranteesthat a deal with the IMF will be reached, there are reasons to be hopeful, he said.
Among these, Hirsh cited the fact that Egypt “is running out of options to plug its external funding hole” and therefore the government “will pull all the stops to agree a deal,” recent comments from the government suggesting reforms might be coming for subsidies in the energy sector – a point of contention with the IMF - and the recent political changes.
Bank of America Merrill Lynch analyst Turker Hamzaoglu warned that “the timing of further support is crucial to avoid a squeeze on foreign exchange reserves by year-end,” noting that a recent deal with Qatar to make a deposit of $2 billion with the Egyptian central bank supports the Egyptian pound in the short term.
FOREX RESERVES
Hamzaoglu wrote in a market note that while Egypt’s net international reserves were $14.4 billion in July, covering 2.7 months of imports – nearing the minimum recommendation of three months’ imports cover – gross liquid foreign reserves – excluding gold, IMF reserve position and special drawing rights – were just $9 billion.
Bank of America Merrill Lynch attaches a 60 percent chance to a scenario where an IMF agreement is reached in the fourth quarter of this year and therefore the Egyptian pound remains stable and a 30 percent probability to a delay in the IMF deal to the first part of next year – which would likely be accompanied by devaluation of between 20 and 25 percent.
A hard landing scenario – where there is no IMF accord and the Egyptian pound suffers a disorderly devaluation – has a 10 percent probability, in Bank of America Merrill Lynch’s opinion.
A global recession that would widen Egypt’s current account gap forcing the pound to weaken, delaying the political transition beyond the end of the year and “failure to mobilize timely and sufficient external aid” are the key risks for Egypt, Hamzaoglu added.
The European Bank for Reconstruction and Development (EBRD)said in its July update on the outlook for countries within its remit that the rebound shown by Egypt’s economy in the first quarter of this year – when it registered real growth of 5.3 percent year-on-year – was “largely driven by favorable base effects reflecting severe disruptions in economic activity in the same quarter last year.”
Growth continues to be held back by weakness in transport, manufacturing and tourism, the bank said, while “FDI has yet to recover, and Egypt is still in a precarious external position.”
Lagarde’s visit will not necessarily result in a deal being agreed, but if a deal is clinched, “this will boost investor confidence as it will signal that Egypt has a credible plan and that it could avoid a disorderly devaluation of the pound, hence a full-blown financial crisis,” Hirsh said.