beyondbrics

After downgrades towards the end of 2011 by Moody’s and S&P and a severe current account deficit, not to mention continued violence and upheaval, Egypt could do with some good news.

So it may be a relief to investors to learn that IMF talks will resume on January 15 – and that Egypt’s short term debt is being snapped up in auction.

The IMF meeting is a “first step in the process leading to possible financial assistance,” according to IMF spokesman Gerry Rice – which is a long way from saying a deal is on the table, after an IMF offer was rejected in June last year. But it’s a start.

The more immediate financing needs of post-Mubarek Egypt look a tiny bit better. The central bank sold E£4.25bn ($704m) of 6-month treasury bills on Thursday, more than the original E£3.5bn on offer. The yield fell slightly to 14.63 per cent, from 14.76 a week earlier. The bank also sold E£4bn of 1-year debt at a yield of 15.55 per cent, about the same as the previous week..

It’s still not enough, though. Any IMF deal would be a key part of plugging Egypt’s budgetary holes, with a $3bn facility being proposed. However, as Said Hirsh of Capital Economics wrote:

[An IMF facility] would not be sufficient to stabilise the country’s growing external payments imbalance. A currency devaluation still seems likely.

In fact, there are still quite a few reasons to feel gloomy. The eurozone is Egypt’s main trading partner; the economic recovery has yet to gain any momentum; over $62bn of debt is due to mature in 2012; spending commitments are still too high; and tourism revenues have fallen.

Lastly, the central bank has propped up the pound to the point where foreign foreign exchange reserves barely cover four months of imports. Alarm bells should be ringing when you look at the following chart:

Sources: CEIC, Capital Economics

That IMF meeting can’t come too quickly.

Related reading:
Egypt: recovery must wait, beyondbrics
Egypt’s markets: worse and worse, beyondbrics
Egypt 2011, FT
The economics of the Arab spring, FT