beyondbrics

Egypt’s long-awaited talks with the International Monetary Fund started on Monday on a possible $3.2bn loan.

But for investors, that might not be enough, says Raza Agha of RBS, who suggests Egypt might need much more “to raise investor confidence”.

Agha did not say in his report how much Cairo might require. But he said in a subsequent email to beyondbrics that it could require $10bn-$12bn to put the finances back in the condition they were in December 2010 – before the political crisis. That, in turn, would involve tough decision in both Cairo and Washington since it is far more than Egypt would normally be allowed to borrow under the IMF quota system.

Agha says in his report:

We think a USD3.2 billion IMF program will not likely be seen as enough to raise investor confidence, despite an assumption that IMF monies would facilitate inflows from multilateral and bilateral donors.

We would also highlight that the market seems to be working with the assumption that the IMF team will come and an arrangement will come shortly thereafter. And while the precarious external sector position may well push the government towards a quick agreement, the domestic pressures which forced the government to pullout from an arrangement last time do not seem to have gone away.

Agha argues that central bank numbers for December showed acceleration in the pace of decline, with $2.4bn zipping out – the highest pace of decline since March 2011 – taking official reserve assets down to $18.3bn. As has been reported, that’s down from $36bn a year earlier.

But Agha says the true decline is worse, with as much as $4bn flowing out from reserves in December after taking into account a $1bn US dollar T-bill auction and a promised $1bn loan from the Egyptian army.

Agha says the accelerated capital flight might have been driven by the clashes in the lead-up to the start of parliamentary elections in late November and the Salafists doing better than the liberal/secular/nationalist groups in parliamentary elections.

So, while Egypt’s revised external financing requirements are still covered by CBE reserves of $18bn or so, $3.2bn won’t have the same impact on market confidence as it might have had when it was mooted early last summer, says Agha.

Since June, import cover has fallen from 6.2 months (for goods imports; and 4.8 for goods and service payments) in June 2011 to 4.1 months at present (just 3.3 for goods and services), calculates RBS.

Revised calculations suggest that Egypt’s external financing has gone up by at least $2.5bn since then given the issue of dollar-denominated bills, reaching around $14bn, including $5bn just for the current account deficit. And even that assumes there will be no more capital flight – which seems optimistic, to put it mildly. The risk of “a loss of confidence” in Egypt’s banks “is not non-negligible now”, says Agha.

Agha’s calculations imply Egypt needs a lot more than $3.2bn from the Fund – and that the requirements could increase with every week that the talks go on. Expect a large hat to be passed around the oil-rich corners of the Middle East.

Related reading:
Guest post: Egypt must bite IMF bullet, beyondbrics
Egypt-IMF: back on track (at last), beyondbrics
Egypt 2011, FT
The economics of the Arab spring, FT