Aside from the need to hold [parliamentary] elections later this fall, enact a council to draft a new constitution, elect a new president and then form a new government–all while managing an ever-simmering divide between sectarian and secular parties and also redefining its geopolitical role (a recent rapprochement with Iran, for instance, along with the notion of curtailing historically below-market natural gas shipments to Israel have the region’s moderates in a flux)–the most pressing issue underpinning valuations in Egypt centers around the country’s financing needs and specifically the stability of FX reserves and by extension portfolio flows.  In a recent research note Barclays analysts remarked that the country’s total production index (a function chiefly of manufacturing, construction and tourism) was down by 25.3% and 22% y/y in January and February and forecast that resulting pressures on fiscal and current account deficits (total state revenues for the nine months to date, fiscal year, are down 5%) could bring Egypt’s gross fiscal financing (i.e. fiscal deficit + debt amortization) needs to 36% of GDP–though much of this is held by local banks who can be expected to rollover debt holdings.  Equally troubling is the fact that although imports are down 15.4% y/y, inflation continues its ascent: March and April headline inflation rose 11.5% and 12.2% y/y, respectively, up from 10.8% y/y in February, and an average of 10.5% over the past year, driven primarily by fruit and vegetable prices but also exacerbated by a deflating currency and wage hikes and subsidies (the latter account for over half of public spending, “limiting the government’s room to manoeuvre in terms of immediate cuts to current expenditures” per analysts).  Nevertheless the expectation of an IMF-World Bank lead lifeline should be adequate and implementation will theoretically place a ceiling in investors’ eyes regarding liquidity risk and hence encourage foreign investment.  Barclays concluded, for example, that the “availability of larger reserve positions – something the IMF and neighbouring Arab countries can help with . . . will go a long way in reassuring investors that Central Bank reserves are enough to cap any significant EGP depreciation pressures and help reduce concerns surrounding the fiscal risks – both in terms of reducing the cost of financing and lengthening its maturity structure, as well as easing the medium-term liquidity burden on the local banking system.”  Ratios to keep an eye on regarding the success of this venture are the country’s overall deficit (estimated to be about 11.4% of GDP by June 2012 versus a pre-revolt estimate of 7.9%), and public debt-to-GDP (~77.9% of GDP compared with 72.8% at end-June 2010).  In the meantime, while capital inflows back into the bond and equity markets are likely to remain subdued, per observers, now might be the time to start thinking about a bottom: arguably sticky institutional foreign money accounts for the bulk of remaining portfolio holdings and the EGX30 now has roughly two months of stable performance under its belt since the March reopening.

Advertisements