The king of Saudi Arabia called it a donors conference, and the newly elected president of Egypt said it was a “friends of Egypt” gathering. In both cases the message was clear: Egypt's economy is in bad need of help. Egypt “needs us today more than ever,” Saudi King Abdullah said in a statement released after the announcement that Abdel-Fattah Al-Sisi had been elected Egypt's next president. He then called for an international donors conference “to help Egypt out of its economic crisis”. The UAE expressed its support for King Abdullah's initiative a few days after its foreign minister had said that the search for partners to support Egypt would include the International Monetary Fund (IMF) and the World Bank. Al-Sisi, the former minister of defence who said he “would finish the Muslim Brotherhood when president” is backed by wealthy Gulf Arab states who also have no love for the organisation. Since the army intervention, Saudi Arabia, the UAE and Kuwait have pledged about $15 billion in aid to Egypt, Al-Sisi putting the figure at around $20 billion, helping to bolster the country's foreign-exchange reserves and cushion the weakening Egyptian pound. However, even with that backing Egypt's economy is growing at the slowest pace in two decades, with tourists and investors staying away because of the political unrest. This has made it impossible to create jobs for the increasing number of unemployed or make poverty rates, currently standing at 26 per cent, lower than they are. Western consulting agencies are also said to be drawing up plans for reshaping the Egyptian economy, according to Reuters. The two consultancies involved are a US firm and the international investment bank Lazards. The consultants have assigned teams to look at issues such as privatisation. “The UAE is involved in the process, as it is among Egypt's lenders. But lending money is not enough in itself. You also need to make sure the government has the means to identify what needs to change and execute it,” said a source familiar with the situation to Reuters. If Egypt were to accept the reforms proposed by the consultants, they could be used as a basis for resuming talks on a loan deal with the IMF. Former president Mohamed Morsi failed to reach agreement on this because of fears of its possible social consequences. However, the government of Prime Minister Ibrahim Mehleb has already been adopting many of these reforms. On Monday, Al-Sisi reappointed Egypt's Mehleb, signaling continuity in the policies adopted since last February. In comments carried by the state news agency, Mehleb said the current government would stay on in a caretaker role until he formed a new cabinet. However, officials have said that many of the leading ministers, such as Minister of Finance Hani Kadri Dimian, are likely to be unchanged. Dimian was last year once described by a senior European diplomat as “the only ministry expert able to deal professionally with the International Monetary Fund” during Morsi's failed attempt to secure a $4.8 billion loan. Masoud Ahmed, Director of the IMF's Middle East-Central Asia Department, told the press last week that the fund had not yet been approached about restarting loan negotiations, but was open and eager for the possibility. The cabinet, headed by Mehleb, a civil engineer who served as housing minister in the former government headed by Hazem Al-Beblawi and used to head one of the region's largest construction firms, Arab Contractors, was appointed in February and has since implemented bold moves that his predecessors had shied away from. These measures have included a long-called-for rationalisation of energy subsidies as well as a widening of the tax base by introducing a 10 per cent tax on stock market profits and a new income tax on those whose annual income exceeds LE1 million. The interim government has also introduced various piecemeal reforms to improve the country's fiscal position, including smart cards, set to be introduced in the coming months, to curb excessive consumption of bread and fuel. “Taking all this together, these reforms would appear to bode well for prospects for the Egyptian economy,” commented Capital Economics, a UK-based macro-economic research group. Interim president Adli Mansour also earlier raised the prospect of a new wave of privatisations, safeguarding former privatisation deals by issuing a law to prohibit third parties from challenging contracts between the state and investors. According to Capital Economics, Al-Sisi may now use his popular mandate to push through further measures to improve the fiscal position. However, these are likely to be piecemeal in nature and may make only a small dent in the overall budget shortfall. “In the absence of bold, but unpopular, reform measures, the economy is unlikely to sustain the growth rates of 4-5 per cent which were seen before the Arab Spring and which are needed to reduce the unemployment rate,” Capital Economics noted. Some observers believe that the lower-than-expected turnout in the presidential elections of 47 per cent may indicate that Al-Sisi does not have a strong enough mandate to adopt austerity measures. Capital Economics expects GDP growth of two per cent this year and 3.3 per cent in 2015. Hani Genena, senior economist at Pharos Brokerage, said the execution of the reforms was necessary in securing the aid packages. “If the government raises energy prices to even half international prices by mid-2015 without material public resentment, global fixed-income fund managers will speculate on a quick upgrade in Egypt's credit rating to investment grade by next year,” he wrote in a research note. This would encourage fixed-income fund managers to invest in the pound's carry trade, meaning that funds borrowed from Europe, the US or Japan at very low interest rates could be used to buy high-yield Egyptian treasury bills. Foreign currency inflows through aid and the carry trade could then help support the pound against the dollar. “The end of the black market [in exchange transactions] might be seen by the end of the third quarter of 2014 at the latest. Afterwards, the official rate is expected to return to LE7.0 or LE6.75, triggering aggressive de-dollarisation,” he said. The pound strengthened slightly at a Central Bank of Egypt sale on Monday to stand at LE7.1402 to the dollar, and it remained steady on the parallel market at around LE7.25, almost last week's rate. The gap between the pound's rates on the official and black markets has narrowed markedly since Al-Sisi's election victory. It had traded for around LE7.50 to the dollar before the elections. The lower demand for the dollar has been explained by traders as coming on the back of expectations of new investment and aid flows from the Gulf countries. Reserves were up at $17.284 billion at the end of last month, up from a critical low of $13.5 billion last year thanks to Gulf aid, but still well down from the $36 billion before the 25 January Revolution. Central Bank Governor Hisham Ramez was quoted by state media on Saturday as saying that the Bank's forex policies were “succeeding in restoring stability to the currency market” and would lead to the elimination of the black market. Ramez was among the first officials Al-Sisi met on his first day as president. They discussed ways of increasing the country's foreign exchange reserves and policies to ensure the stability of the Egyptian pound, the state news agency reported. In an environment of declining treasury yields, a strengthening pound, sovereign credit rating upgrades and recovery in investment expenditure, Egyptian equities are expected to rally over the coming six months, Genena said. He expected the EGX30 index to reach 8,500 points before the end of July, later targeting the 9,500 level to discount the outlook for cash flow expansion. The market has been on the rise since the ouster of Morsi, gaining 67 per cent since last summer. News of the government's introduction of a new capital gains tax stripped the market of marginal gains two weeks ago, but it then rebounded on the news of Al-Sisi's victory and the pending donors conference. The market is expected to witness increased activity, with a long queue of companies preparing to float shares through initial public offerings. Finally, desperate to cover its financing gap, Egypt's Finance Ministry is studying the possibility of issuing its first international bond since 2010. The country has discussed with banks the possibility of an international eurobond issue of between $750 million and $1 billion “whenever the time and need is appropriate to cover the budget gap,” said a source close to the matter to Reuters. Egypt has not resorted to the international debt market since the ouster of former president Hosni Mubarak in 2011 because of the political and economic instability. However, better sentiments about the state of the economy were felt this week with the new president's swearing in. The interest rate paid on Egypt's $1 billion sovereign bond maturing in 2020 declined to 4.73 per cent this week, its lowest since December 2010, from a peak of 11.07 per cent in June 2013. Five-year credit default swaps, used to insure against the risk of an Egyptian sovereign debt default, are at their lowest level since mid-2011.
