Sunday, Sep 27, 2015

Dubai: A large fiscal deficit, a high level of public debt and relatively low level of forex reserves are as growing challenges the Egyptian economy is currently facing.

The large exposures of Egyptian banks to government securities imply a high convergence between their credit risk profile and the sovereign’s credit quality.

In its latest assessment of the Egyptian economy, the International Monetary Fund (IMF) mission to Egypt said the government is making serious efforts to address both fiscal and structural challenges to the economy.

“The mission welcomes the authorities’ plans to pursue fiscal and structural reforms in order to put public debt on a downward-trending path and encourage private sector credit, thereby supporting growth and employment,” said Chris Jarvis, IMF mission chief to Egypt.

Fiscal and structural reforms, alongside forex reforms, are expected to foster growth and jobs, and reduce government’s financing needs.

The revised 2016 budget appears to incorporate gradual fiscal consolidation but analysts say the targets are ambitious and subject to execution risk and delays.

The revised budget deficit target has been set at 8.9 per cent of gross domestic product (GDP), a full percentage point lower than the initially announced 9.9 per cent. The officially anticipated 2015 budget deficit is 10.8 per cent of GDP, versus an earlier forecast of 10 per cent.

The IMF noted that the Central Bank of Egypt (CBE) is making efforts to curb the parallel exchange market. It has also allowed movement in the official exchange rate and widened the exchange-rate margin earlier this year. The IMF mission observed that a gradual move towards a more flexible foreign currency (FX) policy is in the interest of Egypt and it reiterated its readiness to support Egypt in any way that is useful.

“We consider that a gradual move toward a more flexible exchange rate policy focused on achieving a market-clearing rate would serve Egypt’s interests. Such a move would improve the availability of foreign exchange, strengthen competitiveness, support exports and tourism, and attract foreign direct investment,” Jarvis said.

The Egyptian pound (EGP) weakness, followed by renewed spot stability, is seen as an indication that the Central Bank is likely to rely on a gradualist corrective approach for EGP, all the while trying to secure additional external financing.

Analysts say the IMF End-of-Mission statement’s constructive tone continues to suggest a readiness to negotiate the stand-by arrangement (SBA) programme support, although this is not in the authorities’ current plans.

“The previous SBA negotiations had focused on fiscal, rather than FX adjustment. Although the IMF has since started to be more vocal regarding its lack of support for the current FX policy, authorities have disagreed with the IMF assessment. Still, we think CBE will gradually allow some adjustment in EGP while looking for external support from GCC,” said Jean-Michel Saliba, an economist with Bank of America Merrill Lynch.

By Babu Das Augustine Banking Editor

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