Global Investors Wait For IMF Approach On Egypt

International investors see Egypt’s request for a loan from the International Monetary Fund (IMF) as a major step to attracting money back into the country, but may want more progress before they commit their own funds.

Once a darling of frontier market investors, Egypt has lost appeal since the overthrow of President Hosni Mubarak 18 months ago. Worries about instability have combined with concern over a declining currency and dwindling foreign exchange reserves.

But Egypt’s official request this week for a $4.8 billion loan from the International Monetary Fund, announced during a visit to Cairo by IMF President Christine Lagarde, may help.

It is likely to avert a currency or debt crisis, investors say.

“An IMF loan will be seen as positive,” said Daniel Broby, chief investment officer at Silk Invest. “Although a further (currency) depreciation is on the cards, a loan will help shore up the pound against a worse outcome.”

Silk Invest holds Egyptian corporate debt and has recently added to its holdings of bank EFG-Hermes, Broby said, bringing the frontier fund manager’s Egyptian exposure to nearly 10 per cent of its assets.

The Egyptian pound hit fresh seven-year lows after the loan was announced because investors expect the IMF to encourage the central bank to allow the currency to weaken more rapidly.

Since last year’s popular uprising against Mubarak, Egypt has spent well over half its foreign reserves to support its currency, allowing the pound to weaken only by about 5 per cent despite a sharp drop in tourism and foreign investment, two of Egypt’s main sources of foreign exchange.

But a gradual depreciation of the pound, with financial support from the IMF, will allow the central bank to rebuild reserves. It is also less unpredictable for investors than a sudden one-off devaluation.

“They can’t announce one-way bets, but the IMF could say ‘we need to have more exchange rate flexibility’,” said Gabriel Sterne, economist at frontier markets brokerage Exotix. “It’s about getting the policies in place that restore confidence.”

Reflecting the positive sentiment towards the loan talks, Egyptian stocks are trading at five-month highs, while the country’s debt insurance costs have fallen by 50 basis points.

Reuters