For Egypt’s Central Bank, financial donors are always welcome.
Whether it’s Qatar, Saudi Arabia or even controversial international lenders like the International Monetary Fund, if the donation looks and feels like US dollars, Egypt is happy to receive it. Especially at a time when the country is desperate to fund dollar-denominated fuel and wheat imports, but limited foreign currency reserves make it too expensive.
So last night on Egypt’s CBC channel, when TV host Khairy Ramadan called on all Egyptians – the business community, celebrities, Egyptian expatriates and ordinary citizens – to donate to a national fund to help Egypt out of its economic malaise, many Egyptians were happy to take part.
Anyone can deposit money into the “Egypt Fund” using bank account number 306306 (all Egyptian banks are accepting donations).
Within minutes, hundreds of Egyptians were calling to donate money to the cause. Even children donated pocket money.
But one person in particular stole the show. Mohammed Hawas, chief executive of Sahara Group, an engineering company declared that he would donate a whopping $5 billion. (By the way, he was a presidential candidate in 2005, so undoubtedly, a political element is at play here…).
The national fund, trending on Twitter with the hashtag #EgyptFund, has already stirred debate.
For some, it highlighted the patriotic duty of Egyptians at a time of instability. Some said if the donations continue at the same pace, Egypt would have no need to sign a loan from any other country or organisation, including the IMF. Some even went as far to say that Egypt could eventually lend money to the US and not the other way round.
Other viewers were more sceptical. “I’ll believe it when I see the money with my own eyes,” said one unconvinced Tweep. “So I should give up my money for the economy even if it doesn’t work?” asked another.
For all the discussion for and against the account, Egyptians should be reminded that this is a tried and tested method. Even under Mohammed Morsi, a “Renaissance Account” was opened encouraging the same donations, for the same cause.
It didn’t work that time (or we would have heard about it) and it is unlikely to work this time.
The account might be a crowd-pleaser rallying positive momentum for Egypt’s economy, but if the country is really serious about improving the economic situation, the interim government needs to move quickly on the formation of a cabinet so that the government can function properly and real reforms can be pushed through.
Egypt’s state oil company, the Egyptian General Petroleum Corporation, is in big trouble.
It has racked up billions of dollars of debt in the last decade with some estimating its dues to banks and oil companies is as high as $20 billion.
The magnitude of EGPC’s debts is such that it would be rare to find an oil company in Egypt which is not owed money. The growing debt pile highlights the government’s struggle to meet its rising energy bills while trying to keep subsidised prices to avoid public unrest.
This Reuters story describes the problem in a nutshell:
Egypt has been delaying payments to firms producing oil and gas on its territory as it has struggled with dwindling currency reserves, rising food bills and sliding tourism revenues since the 2011 revolution that overthrew Hosni Mubarak.
Most oil firms hope to recoup the debts in full, but they acknowledge it could take years. While they are still planning to invest in new projects in Egypt that will help it avoid an energy meltdown, the debt situation remains a challenge.
The government’s delay in paying its debts to oil and gas producers could hold back investment in the sector and potentially endanger Egypt’s energy security.
But exactly how many companies have been impacted and what kind of money are we really talking about?
The following spreadsheet, acquired by Rebel Economy from an investment bank which has major interests in Egypt’s energy, lists the debts owed to no less than 42 companies for oil and gas exploration.
The spreadsheet shows that while a number of small companies are owed money, several large energy companies have achieved special repayment deals with the government.
Of the companies listed, Italy’s ENI agreed to allow EGPC to delay on a $100 million payment, the UK’s BP agreed to defer $600 million, and BG Group also of the UK, $589.8 million.
The spreadsheet ends January 2012, but it one of the clearest barometers of the scale of EGPC’s debt to oil companies that has been made public. Even this document is seen as portraying a conservative total debt figure of only $3.44 billion when actual debts to oil firms are estimated to be at least $5 billion.
If you want to look at this in more detail, click here.
Yet this is just the tip of the iceberg.
EGPC’s debts to banks, to countries that are lending the country fuel at sometimes preferential rates, and even debts to other ministries (the finance ministry has injected billions of dollars to the electricity ministry) set a frightening precedent for what Egypt is facing today.
With Egypt’s inefficient and costly energy subsidy system at the core, this is yet another example of why the country must take long-term steps to reform the system or be forever in debt to others.
How did Egypt’s economy survive before the revolution considering it was a ticking time bomb?
Why have energy subsidies, which swallow a fifth of the budget, only become a financial burden now?
What has changed?
The following hair-raising chart from London-based economist Ziad Daoud explains all:[caption id="attachment_1692" align="aligncenter" width="640"] Ziad Daoud[/caption]
Egypt’s economy has gone through a three-stage transformation, Daoud explains:
Phase 1: Before the Revolution
Foreign investments either through directly investing in infrastructure projects or buying factories, or financial investments into the Egyptian stock market or government bonds. These investments, up till the revolution that began in early 2011, were sufficient to cover the current account deficit (i.e., when a country’s total imports is greater than the country’s total exports, which can be dangerous if not kept in check).
As a result, the Central Bank of Egypt’s (CBE) reserves remained largely untouched and reached a peak of $36 billion at the end of 2010.
Phase 2: The Revolution
Three things changed after the Revolution.
1) First, despite the rise in remittances, the current account deficit grew larger mainly due to the fall in tourism.
2) Second, direct investments halted to near zero.
3) Third, foreign capital flows into the Egyptian stock and bond markets quickly reversed course and flowed out of the country (the light blue bar in the chart).
The changes put pressure on the pound but the currency was supported by the CBE’s intervention in the foreign exchange market using its international reserves. This meant reserves fell below the minimum safety level—estimated by the CBE to be around $15 billion—in the second half of 2012.
It also meant a change of strategy – the current account deficit and financial account deficit were now being financed by the CBE’s reserves.
Phase 3: After the Revolution
With international reserves all but exhausted, the government—loathed to accept a currency depreciation—started to look for alternative sources of external funding. It was during this phase that it reached a preliminary agreement with the International Monetary Fund (IMF) in November 2012 only to backtrack on the deal.
Instead, the government managed to finance the current account deficit with loans from Turkey, Saudi Arabia, Libya and especially Qatar. Most of these loans are in the form of deposits at the CBE, some of which can already be seen as the dark-grey bar in the chart and more are likely to show up when the CBE publishes the balance of payments figures for the latest quarter. Indeed, thanks to these loans the CBE announced last week that its foreign currency reserves had increased to $16 billion at the end of May.
Egypt is once again on the precipice of signing the IMF loan, saying a deal would be agreed by the end of this month. This could mark the Fourth Phase of Egypt’s economic transition, but as the government’s top advisor Essam El Haddad, complains to the Financial Times that it’s all the IMF’s fault, maybe we shouldn’t hold our breath…
While the economic impact of the revolution was not one that could easily be managed, the decisions to steer the country in the right direction could have been different.
Because, what does the above tell you?
It shows that every single cabinet elected after the fall of Hosni Mubarak, every prime minister and even the Supreme Council of the Armed Forces which coveted its role as a military caretaker government before President Morsi was elected in June 2012, have turned Egypt from an economy suffering because of its unstructured, inefficient welfare system, to an economy that is surviving on welfare – loans from others.
Isn’t it ironic, don’t you think?
Yesterday, much to the surprise of investors and bankers, Egypt’s ministry of finance said it was considering restructuring its local and foreign debts to reduce pressure on the general state budget, according to Zawya.
Egypt’s total debt, according to Zawya figures, stands at EGP1.29 trillion or around $185 billion, yet there were few details provided on how this restructuring could play out.
According to the finance minister, Fayyad Abdel Moneim:
“We are considering loans from the Central Bank of Egypt (CBE) at the announced rate, instead of resorting to the Treasury bill [T-bill] mechanism at 13%, which will ultimately alleviate the general debt. This would also restrict monetary printing operations, which could result in the exacerbation of inflation”.
The term ‘restructuring’ always implies default, or imminent default, so the fact the minister of finance has gone on the record with a statement that the country is considering this move is worrying, especially considering the big question today is whether Egypt will collapse or not.
But perhaps the terminology used is just wrong.
Let’s give Mr Abdel Moneim the benefit of the doubt. Perhaps he actually meant “refinance”, which means replacing old debt with new debt and using the proceeds from the new debt to pay off the old debt’s principal (restructuring is more drastic, and normally leads to a reorganisation of capital structure by exchanging current debt for other types of securities, waiving defaults, raising capital by selling assets and perhaps even…..going through bankruptcy!).
This means, according to his statement, Egypt’s government would borrow from the Central Bank at the cheaper interbank rate of around 10%, rather than sell government securities to banks, which would usually cost at least 13%. This would be a welcome relief for Egypt, where debt service payments on bonds and bills it sells make up at least 20% of the budget – a huge weight alongside energy subsidies.
So what’s wrong with that?
The move is likely to jeopardise the independence of the Central Bank. Not only would it appear like the Central Bank is subsidising sovereign debt by offering cheaper rates to the government, but it creates governance issues because the Central Bank starts to function like the ministry of finance – taking funds from investors (in this case banks) to finance government spending.
In the worst case scenario, if the government needs more money (which is very likely considering its spending habits), it may prompt the CBE to raise reserve requirements (basically the amount of funds banks are asked to hold to make loans with).
This could ultimately compromise the position of the CBE, anger the banking community which has been supporting the government for the last two years through buying T-bills and bonds (albeit at a fairly high return), and further undermine the Morsi administration and its economic decisions.
That’s not to say Egypt is safe from default.
Egypt’s sovereign credit rating is very low at the moment and that means the risk of default is high. But, because most of the country’s debt is technically “domestic”, Egypt can roll-over repayments. It needs to print more money to do this, however, and that would cause serious inflation.
But whether Egypt is refinancing or restructuring, there is a fundamental flaw here that has left bankers puzzled: details are scarce and there are no plans being discussed openly. Egypt’s ministries must streamline, work together and stop announcing random potential plans, that may or may not come into fruition.
This story even surprised members within the finance ministry itself.
Mr Abdel Moneim may be new to his job (he became finance minister just a few weeks ago), but it’s high time there was some coherence in one of the most important ministries in Egypt.
Rumours are everything in the financial market. What can start as harmless speculation can quickly spiral out of control, sometimes causing a free-fall in company shares, or worse, an entire market.
In the last few weeks alone, hackers on Twitter spreading rumours of a White House attack sparked sudden sell-offs of stocks and bonds to the embarrassment of traders who believed the rumours, and news websites who were unknowingly hacked.
The big markets always recover, however.
In Egypt, it’s a different story where the economy is vulnerable to the slightest shock and rumours become dangerous.
The value of the domestic currency, the Egyptian pound, has fallen on the black market on speculation that the country’s government does not have a strong handle on the economy. That is only putting extra pressure on foreign reserves at a time when the coffers are close to breaking point.
But there’s another worrying rumour brewing in the background: the shortage of wheat.
Hassan Massoud, a vice president at an Egyptian private equity firm, says Egypt “could face the mother of all socio economic crises: a shortage of bread”, if rumours about the wheat market are to be believed:
In an article for Shorouk, Wael Qandi, a highly regarded columnist, makes four shockingly erroneous claims on the economics of wheat in Egypt.
1. Egypt’s wheat production in 2013 is 9.5-10 Million tons.
2. The increase in wheat production is due to the patriotism of farmers. (a point made implicitly in his characterization of farmers increasing wheat production as “those who innovate in silence, playing a musical ode of dignity, unencumbered with the barons of speech and the planters of anger and hatred”)
3. There exists a group of “gangsters” who buy wheat from farmers only to store and burn it, according to President Morsi.
4. Increased wheat production in Egypt is a good thing.
But most of these “Facts” are merely rumour, Massoud says:
1. The main Egyptian wheat crop is harvested in May/June. 9.5-10 Million tons is an estimate from the government for this year’s harvest and not an actual production figure.
Interestingly, that estimate has been doubted by analysts local and foreign, including the United States Department of Agriculture. Alarmingly, the government has scaled back its wheat imports this year in anticipation of this bumper harvest. Should detractors prove correct, Egypt could face the mother of all socio-economic crises: a shortage of bread.[caption id="attachment_1642" align="alignright" width="525"] Egyptian Picture Gallery[/caption]
2. The increase in the local wheat harvest is not due to “patriotism” but because the Egyptian government has, for the past two years, been buying locally farmed wheat at a substantial markup to international prices.
Today, the international price of wheat is 2,100 EGP/ton (at official exchange rates). However, the Egyptian government buys the ton at 2,666 EGP/ton: a 27% mark up.
When you factor in transport costs and quality differential (Egyptian wheat is of lower quality than wheat typically traded on international markets and would fetch a lower price) you realize that the Egyptian government has been buying wheat at almost a 40% mark up to its true price at international markets.
Naturally, Egyptian farmers are producing more and more wheat as they can sell it at artificially high prices.
Even more worrying, there is anecdotal evidence that unscrupulous traders are buying wheat on international markets, importing it privately into Egypt (a process that is perfectly legal) and selling it to the government as “locally grown wheat” thus pocketing a profit in the difference between the international price and the artificially high price paid by the Egyptian government.
3. Perhaps the only thing more alarming than a respected political analyst peddling the notion that a group of gangsters is out there buying wheat and burning it, is the President also peddling the notion. It is absurd to believe that there exists a gang whose route to illicit riches involves buying wheat at artificially high prices and burning it.
4. Most importantly, Mr Qandil implicitly assumes that the increase in local wheat production is a good thing. Egypt is a famously water poor country (availability of water to the average Egyptian is expected to drop from a current 640 m3 to 370 m3 compared to a global average of 1,385 m3). Meanwhile, wheat is one of the world’s most water intensive crops; best suited for “water rich” countries. Perhaps Mr Qandil should reconsider the long accepted notion that Egypt should plant more wheat.
Middle East economists and analysts have tried and often failed to answer Egypt’s million dollar question: Will the country’s economy collapse and, if so, when?
Finally, someone has crunched the numbers to give us an answer.
London-based economist Ziad Daoud pored over Central Bank data and reckons the scare-mongering (of which the media is to blame of course…) of Egypt’s imminent economic collapse is largely unwarranted.
Egypt needs to raise $11.7 billion in the next 12 months, according to International Monetary Fund estimates.
هذا هو الجزء الثاني من سلسة ممتازة مكونة من جزئين من إعداد إيزابيل إسترمان وترجمة ريم مكين، تدور حول السندات الحكومية: أذون الخزينة وأدوات الدين الأخرى المباعة من قبل الحكومة (بما في ذلك الحكومة المصرية) لتسديد قروضها. الجزء الأول هنا.
هذه المرة ننظر إلى تأثير الإعتماد على السندات الحكومية لتغطية إحتياجات الإقتراض.
لا يوجد شك في أن إقتصاد مصر يعاني، لكن إذا انتبهت لإصدار السندات ونتائجها، فستجد أن الحلقة المفرغة من الدين مستمرة. طالما أن دين مصر ينمو أسرع من إقتصادها، فستصبح الأمور سيئة.
تحتاج مصر إلى تنظيم حساباتها عن طريق خفض الإنفاق (إعادة توزيع الطاقة والدعم على الطعام هي الأشياء الأولى البدء بها) ورفع العوائد (زيادة الضرائب، وإدخال التمويلات العسكرية والوزارية داخل الخزينة إن أمكن). إذا لم يتم ذلك بطريقة صحيحة، فمن الصعب تجنب الإضرار بالضعيف أو إغضاب القوي، ومن الصعب رؤية كيف تمتلك الإدارة الحالية القدرة السياسية للقيام بذلك.
هذا هو الجزء الأول من سلسة مكونة من جزئين من إعداد إيزابيل إسترمان وترجمة ريم مكين، تدور حول السندات الحكومية: أذون الخزينة وأدوات الدين الأخرى المباعة من قبل الحكومة (بما في ذلك الحكومة المصرية) لتسديد قروضها.
في السنتين الماضيتين أعتمدت مصر بشدة على البنوك المحلية في محاولة لتقليل العجز وتمويل إحتياجات القروض.
اقتراض المال من المقرضين يشبه إلى حد كبير إقتراض شخص من البنك: يُقيم البنك تاريخ رصيدك، تقترض مبلغ X من الدولارات وتدفع Y في المائة فوائد.
إصدار السندات مشابه جداً لهذا المثال
الرسم بأسفل هو مقدمة عن السندات الحكومية والغرض منها. نشرح المزيد عن ما تسببه لمصر في الجزء الثاني.
If you have tried to exchange US dollars and Euros at any bank in Egypt, you will likely be met by an apologetic shrug and asked to come back another time.
As Egyptians flock to a parallel market to meet their needs – either to cover import costs, before travelling abroad or to protect against the depreciation of the pound, a new website, EshteriDollar.com (Arabic for “Buy Dollars”) is aiming to fill a gap left by the government and currency dealers. Aimed at anyone living in Egypt, the website invites individuals wishing to either buy or sell foreign currencies at a better price than the official or black market.
Egypt is struggling to slow a fall in the domestic currency, which at official rates has fallen about 10 percent against the dollar this year.
The Central Bank has tried to control the decline in the Egyptian pound by introducing weekly dollar auctions. But dollar supply remains scare, and the government is having to give priority to importers of essential goods (including for wheat and fuel), leaving other importers and individuals to meet their hard currency needs via the parallel market.
The currency’s value on the black market, meanwhile, is falling fast. Dealers and market participants say dollars are being offered at rates as low as 8 pounds. That is compared to 7.50 pounds just a few days ago. The official rate is 6.80 pounds to the dollar.
Rebel Economy spoke to the owner of EshteriDollar, an economist based in Egypt, who asked to remain anonymous:
EshtariDollar: We started the website in February of this year, it started to pick up in April, when the “real” price of the dollar started to spike in comparison to the official rates.
The only reason the website exists is because there is a deviation between the official and real dollar price. We hope that some day (the sooner the better) we can shut down the website, because we are no longer “needed”.
I don’t think the currency market in Egypt is free. A free market exists when the price is defined by the supply and demand. But in Egypt, there is an officially set price for the dollar, interfering in the price setting mechanism.
At the artificially low rates the demand for dollars is high, but there is no supply meaning we come to a standstill and no transactions take place. What market participants do in these situations is basically turn to an un-official market to be able to conduct their transactions. Who benefits from such a situation? Mainly, the black market dealers.
The black markets are not transparent and the dealers tend to be able to generate large profits from the BID/ASK spread (the spread is the difference between the price you can buy and sell at). This is where EshteriDollar comes in, we take the dealers out of the equation and allow buyers and sellers to get together without a middle man (we don’t charge any sort of commission).
If the idea of the website catches on I am sure it will lead firstly to higher transparency (because you have a vast amount of different offers you can choose from) and also to lower prices.
– How does EshteriDollar work? How can I get involved?
ED: It is pretty simple: If you need foreign currency or Egyptian pounds you go to the website and post your ad (under Offers) you can alternatively enter “The Market” and scan who is selling or wants to buy foreign currencies. You can contact the seller (or buyer) by phone or email and negotiate between yourselves.
EshteriDollar is not involved in any form in buying or selling currencies, we have simply put together a market place for people to meet and trade. We should also mention that we do not verify the ads, meaning users should be cautious when trading with large amounts of cash.
– What do you make of Egypt’s currency policy decisions in the last two years?
ED: I am in general a critic of central bank policies worldwide and I am a proponent of Friedrich A. Hayek’s view that the production of money should be denationalised. Central banks tend to neglect one important function of money, namely that money should be a store of value. Their continuous “money printing” increases the supply of money relative to goods, thus driving the prices up. This is the main reason for the existence of inflation. These actions impoverish the lower and middle classes. This is especially problematic in Egypt where wages are not adjusted according to inflation, end in loss of savings.
Egypt is now repeating history. We had a similar situation during the Asian crisis. Foreign Direct Investment suddenly and abruptly stopped, most countries had a “quasi-peg” to the dollar and depleted most of their central bank reserves in an effort to keep the exchange rate stable and in the end they were forced to devalue the currency massively, because they simply didn’t have enough dollars to hold the rate.
It took nearly two years and a depletion of more than 50% of the central bank’s assets to finally, move away from setting the dollar at a rate of around 6 pounds. Ideally, they should have stopped intervening a long while ago.
The current devaluation is a step in the right direction, because its bringing the Egyptian pound closer to its real rate. I do however think one should speed up this process, especially in the economic situation we are in. Imagine the blessing for the tourism or export industry if all our goods were 20-30% cheaper for foreigner importers and tourists? At the same time imports to Egypt would decrease, which would be good for the growing balance of trade deficit.
– What do you get out of this? Commission from the currency exchange?
ED: Nothing! Anyone can post free of charge on the website and we are not involved in the transaction in any form and therefore can’t (even if we wanted to) charge any sort of commission. The whole idea is more ideological than anything else.
For the sake of transparency I should mention that we have some ads on our website, which generate some negligible revenues that don’t cover hosting and other expenses.
– What makes your website different and better to, say, a normal currency exchange on the street or a black market dealer?
ED: Our goal is to cut out the black market dealer, by bringng together buyers and sellers directly. When you trade with a bank, currency exchange office or a black market dealer there is always a spread. This spread is typically higher in black markets than other markets, because the black market dealers are taking on a risk by acting illegally or having to pay off police officers (which has been reported in Egypt recently). By cutting out the middle man both buyers and sellers benefit.
Here is an example:
Someone sells their dollars to a black market dealer at rate of 7.5 Egyptian pounds. The dealer will then sell these dollars to a willing buyer for 8.0 pounds and pocket the difference of 0.5 pounds per dollar. If you cut out the dealer you can get a better price for both parties. The seller can sell his dollar for 7.75, getting 0.25 EGP more on the dollar than the official rate, and at the same time the buyer will get the dollars 0.25 pounds cheaper. In essence, a win for both parties.
This is PART 2 of an excellent two-part series by Isabel Esterman on government securities: treasury bonds and bills, and other debt instruments sold by a government (including Egypt) to finance its borrowings. Here is Part 1.
This time we’re looking at the impact of relying on these financial instruments to cover borrowing needs.
We all know that Egypt is in really bad shape, but if you start paying attention to bond issuances and yields, you can watch (in horror) as this vicious circle of debt continues. As long as Egypt’s debt grows much faster than its economy, things are going to be rough.
As to how to solve this, one possible route is for Egypt to get its accounts in order, by cutting spending (restructuring energy and food subsidies is the obvious place to start) and raising revenues (increasing taxes, and possibly bringing military and ministerial funds into the treasury). Unless this is done very well, though, it’s hard to avoid hurting the vulnerable or angering the powerful, and it’s difficult to see how the current administration has the political capital to do either.
In theory, Egypt could also come up with a comprehensive stimulus plan, and convince lenders (domestic and foreign), that a big enough infusion of cash will get Egypt’s economy back in gear without the need to resort to austerity measures. For this to work, it would have to be a whole lot more detailed and credible than what we’re seeing come out of either the ruling party or the opposition.
Disclaimer: In the course of the research for this graphic, it was discovered that the proportion of government spending on debt servicing (to cover the repayment of interest and principal on a debt) was actually much larger than the figure extensively used in the media. It stood at 35.7% rather than the “25%” often quoted in mainstream media.
We have consulted bankers and financial analysts to confirm this, but there is still controversy over how it the figure should be calculated. It is a matter of terminology, so for number geeks out there, we have chosen to look at entries (sources below) for “interest” and “loan repayment” as a percentage of total budget outlay, rather than “interest” as a percentage of “expenditures”, which yields the more widely-cited figure of 25%.