Even With Billions in Gulf Aid, Egypt May Still Turn to IMF

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Egypt's President Abdel-Fattah El-Sisi
Egypt's President Abdel-Fattah El-Sisi. Photographer: Chris Ratcliffe/Bloomberg

Egypt’s on-off talks with the International Monetary Fund may be back on again, as investors say IMF loans offer a stronger platform for reviving the economy than the Gulf money currently keeping it afloat.

Even with signs of a recovery in tourism and investment, the gap between Egypt’s foreign currency receipts and needs may reach $15 billion a year by 2017, said Jason Tuvey, a London-based analyst at Capital Economics. Support from Gulf Arab countries is “keeping strains in its balance of payments contained,” but it’s “not a long-term solution,” he said.

In the political upheaval that followed the revolt of 2011 and the army takeover two years later, as investors fled and currency reserves plunged, Egypt turned to the Gulf. First Qatar and later Saudi Arabia and the United Arab Emirates obliged, with more than $40 billion in grants, loans and investments to prop up sympathetic governments. Meanwhile, repeated talks with the IMF broke off short of a loan accord.

The current government, headed by ex-general Abdel-Fattah El-Sisi, hasn’t ruled out a loan from the IMF, though the deputy finance minister, Ayman El-Kaffas, denied a report in El Watan newspaper last week that a $6 billion deal would be discussed with IMF officials in Cairo next month. The government also plans a Eurobond sale, Egypt’s first since 2010.

IMF ‘Superior’

For bond investors, “IMF funding is seen as superior,” said Sergey Dergachev, who helps oversee $13 billion of emerging-market debt as a senior money manager at Union Investment Privatfonds GmbH in Frankfurt. It means “some sort of fiscal discipline, prudent debt management policies.”

El-Sisi is already enacting some policies the IMF typically requires as conditions for loans. Egypt slashed fuel subsidies in 2014, and aims to cut its budget deficit by at least 1.5 percentage points to 10.5 percent of economic output this year.

The fund would likely require faster action on that and other issues, and that would be a good thing, according to Lutz Roehmeyer, director of fund management at Landesbank Berlin Investment.

“Investors so far have the impression that politics and reforms are moving too slowly in Egypt,” he said. “An IMF program will increase certainty that there will be a reform agenda.”

The IMF this week criticized Egypt’s decision to delay imposing a capital gains tax on stocks investors. Chris Jarvis, head of the Fund’s Egypt mission, also said that the government hasn’t requested IMF financing. The tax U-turn spurred a two-day, 7.5 percent surge in the benchmark stock index.

Bolstered by the Gulf handouts, El-Sisi’s government has steadied the economy and spurred a market rally.

Qatar Debt

Gross domestic product is expected to grow by at least 4 percent in the current fiscal year, its best performance since the 2011 uprising. The EGX30 is up more than 80 percent since the army takeover in July 2013, while the yield on Egypt’s dollar bonds maturing in 2020 has plunged close to 4 percent, from almost 11 percent.

Egypt sought to market its fledgling recovery at an investor conference in March, where the government says it got pledges worth $36 billion. Most of them came from the Gulf, including a $6 billion deposit in the central bank that helped replenish international reserves.

That cash may not last long, though. Egypt has $4.45 billion in foreign-currency commitments in 2015, according to Cairo-based investment bank EFG-Hermes. Those include repaying $1 billion to Qatar, which has fallen out with Egypt since the army takeover, and $700 million to Paris Club debtors. The government also owes money to international oil companies.

‘Tied Down’

From the government’s point of view, there are drawbacks to IMF funding, Tuvey said. “Egyptian authorities would prefer not to be tied down by an IMF financing package and instead undertake economic reforms at its own pace and rely on financing from the Gulf as a backstop,” he said.

Egypt is currently not seeking an IMF loan because the pace of required reforms may not be compatible with social conditions in the country, the state-run news agency quoted International Cooperation Minister Naglaa Al-Ahwany as saying on Wednesday.

Many economists, though, believe that the squeeze on Egypt’s finances will force the government to overcome any such scruples.

“Sooner or later, we will have to resort to the IMF,” said Omar El-Shenety, managing director at Cairo-based investment bank Multiples Group. “For credibility first, before its money.”

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