Exactly in line with our expectations, Egypt’s net international reserves (NIR) gained USD0.441 billion in October 2012, reaching USD15.48 billion, data by the Central Bank of Egypt showed.
NIR rose 2.9% m-o-m and declined 29.6% y-o-y in October 2012. The rise in NIR was mainly a reflection of an increase of USD0.46 billion in foreign currency (FCY), which reached USD10.86 billion in October 2012, up from USD10.4 billion a month earlier. Gold holdings were revalued as scheduled at the end of FY 2011/12, and therefore increased by USD0.56 billion from USD2.7 billion in May 2012 to reach USD3.3 billion in June 2012.
Our expectations were mainly on the back of a couple of positive triggers in the capital and financial account that offset some of the weak fundamentals that persisted in the current account during October 2012.
First, the September tranche of Qatar’s USD2 billion deposit in the amount of USD0.5 billion was deposited at the Central Bank of Egypt on October 1st. Second, the first tranche of Turkey’s USD1 billion pledged deposit, in the amount of USD0.5 billion, was scheduled to be paid in October 2012 (however, we are not certain that this was actually deposited in October 2012).
Furthermore, a number of investment deals have been made recently, and some of the funds were expected to flow into Egypt in October 2012. For example, Egypt’s government signed an agreement with Samsung Electronics Co. for the company to invest EGP1.85 billion (USD304 million) to build electronics and household appliances in the country’s south. In addition, Egypt and Qatar discussed building a regasification plant in Egypt with a refining capacity of 4.2 million tons of oil a year, which will cost USD3.6 billion.
In November 2012, we expect the balance of payment fundamentals to weaken further through both the current and capital accounts. The negative sentiment during November 2012 instigated by the court cases against some of the companies operating in Egypt will weigh down on NIR through a wave of portfolio outflows and a slowdown in FDI inflows. Moreover, the continued pressure on Egypt’s trade balance, through an increase in the volume and value of imports as a result of domestic shortages and a slowdown in exports as a result of the global slowdown, will also weigh down on NIR.
Furthermore, Egypt’s FX earners such as the Suez Canal and tourism are not performing at their best and are expected to continue their weak trends in November 2012. On the debt payments front, there is a USD1.53 billion one-year T-bill with an average yield of 3.872% scheduled to be paid on November 26th, 2012, by the Egyptian government, but there is a possibility of the T-bill being rolled over. On the positive side, another tranche of Qatari money in the amount of USD500 million is expected to be deposited at the CBE in November 2012, offsetting some of the downward pressure on Egypt’s reserve position.
Finally, the first tranche of Turkey’s USD1 billion pledged deposit, in the amount of USD0.5 billion, which was scheduled to be paid in October 2012, and whose actual disbursement we know nothing about, could act as a positive trigger if deposited in November 2012. Consequently, we expect the NIR to shed the same amount it gained in October 2012 to reach USD15 billion by end of November 2012.
Going forward in FY2012/13, we believe that weak fundamentals in Egypt’s balance of payments persist and will continue for the next couple of months, only to be offset by foreign inflows whether in the form of aid or investments.
We pointed out in our previous notes that the performance of the balance of payment and NIR, and hence the EGP, will continue to be linked to the amount of external financing received to bridge the gap in the balance of payment. We estimate this gap to reach USD9 billion in FY2012/13, already taking into account Qatar’s pledged USD2 billion.
We provide two scenarios for the USD/EGP performance in FY2012/13, with and without the IMF loan and associated funding. With an IMF loan and associated funding, the USD/EGP should stabilize with a modest depreciation to average 6.20 during FY2012/13. Without an IMF loan and associated funding, and with a financing gap of USD9 billion, the USD/EGP should witness a deprecation of 15%, to average 7.0 during FY2012/13. Should the EGP witness a depreciation, we still believe it will happen gradually during the year. We believe that, at this particular juncture in Egypt, the disadvantages of abandoning the de facto peg and depreciating the currency significantly will outweigh its advantages. It seems more likely than ever, though, that Egypt will succeed in obtaining the necessary funding to maintain a stable exchange rate and manage a very modest depreciation in its domestic currency.