Egypt Pound-Forward Drop Shows Success of IMF Talks in Doubt

Egyptian pound forwards weakened to a record low as the restart of International Monetary Fund talks failed to restore confidence in the government’s ability to end the economic crisis. The country’s dollar bond spread climbed.

Twelve-month non-deliverable pound forwards weakened 3.1 percent to 8.45 per dollar at 5:46 p.m. in Cairo, the lowest level since Bloomberg started tracking the contracts in 2007. That reflects expectations for the currency to lose 20 percent over the life of the contracts. The pound has declined 8.8 percent since the central bank started selling dollars at auction in December to ration the use of foreign currency.

Parliamentary elections that were to take place next month have been halted by court order, hurting the government’s ability to demonstrate broad consensus for the loan as required by the Washington-based lender. The IMF said this week it’s committed to “try to reach an agreement” for a $4.8 billion loan “in the coming weeks.”

“We’ve been hearing the same thing on the IMF for the last couple of years in terms of the need for cross party support, which can only happen after elections,” Anthony Simond, emerging markets investment analyst at London-based Aberdeen Asset Management, said by telephone. “At this point, investors are likely to take any IMF news with a pinch of salt until a deal is signed.”

Political Unrest

Political unrest has forced the government to scale back plans to raise taxes and reduce subsidies, resulting in a revision of its budget-deficit target to 9.5 percent of economic output in the 2013/2014 fiscal year compared with the 8.5 percent goal it set in November. Economic growth fell to the lowest level in two decades amid protests and deteriorating security.

The premium in yield investors demand to hold Egypt’s dollar-denominated debt over U.S. Treasuries climbed 13 basis points, or 0.13 percentage point, yesterday to 591, the highest level since June 25. That brings the increase this quarter to 138 basis points, the most since the three-month period that ended December 2011. The Middle East average has declined two basis points this quarter to 424.

“There’s no framework in place that the market can look at to see where Egypt is going to be in the next three to six months, so Egyptian assets are likely to trade at a considerable discount to their regional peers until then,” Simond said. Egypt’s troubles “reflect a dysfunctioning political environment and the market doesn’t see an end to this any time soon.”

International Reserves

The $13.5 billion of international reserves held by the central bank aren’t enough to cover three months of imports, according to data compiled by Bloomberg.

The pound was unchanged at 6.7894 a dollar. The yield on the government’s benchmark $1 billion of 5.75 percent dollar bonds due in April 2020 retreated two basis points to 7.33 percent. That pared its increase this quarter to 130 basis points.

Locally, the government will seek to raise 11.5 billion Egyptian pounds ($1.7 billion) at treasury auctions over the coming week, part of its effort to raise 150 billion pounds in the quarter. Government borrowing costs have declined amid the unrest, attracting growing bank deposits. The average one-year yield has dropped 73 basis points from a four-month high in January to 13.78 percent.

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