Hands Up If You Believe Morsi

This post has been updated to include Religare Capital Markets strategist Emad Mostaque’s point of view

Egypt’s new head of state, Mohammed Morsi, has declared that a currency devaluation “is completely out of the question” and ruled out any new taxes.

This decision may sit well with public consensus, considering a devaluation would immediately raise the price of imports, making it more expensive to buy basic goods like sugar and wheat.   And, taxes are never fun.

His diagnosis for the country’s deficit is good-old fashioned investment, tourism, foreign trade and exports.  Of course, if he were to devalue the currency, it would encourage exports.  A weaker pound would also stop a drain on foreign reserves which plummeted to $14.42 billion in July 2012 from $36 billion at the end of 2010.

[caption id="attachment_418" align="aligncenter" width="400"] Mohammed Morsi, Flickr, Wikimedia Commons, By AsianMedia[/caption]

There is a deeper concern about these decisions however.

a) Morsi is trying to take the easy way out opting for safe, unambitious solutions (a bit like the choices behind his technocratic government).  Mediocrity never works for a government which has big challenges ahead.

b) Morsi says one thing, and does something else.  It would be no surprise if the government went ahead with a devaluation anyway in the next six months.  The IMF loan is a case in point.  When Morsi was chairman of the Muslim Brotherhood, the Islamist group was adamant the-then $3.2 billion loan wouldn’t go through unless all other alternatives for raising revenue were explored first (one example given was to increase export prices for Egypt’s natural gas).

No one borrows money without checking what he has first and the other alternatives,” Ashraf Badr el Din, the head of the Freedom and Justice Party’s economic committee told me back in January (via Zawya Dow Jones). 

Now Morsi is leading the talks with the IMF delegation without a whisper of what was said a few months earlier.

It is important to note that Mubarak carried out a “reform-by-stealth” in 1980s and 1990s where he quietly did all kinds of things in compliance with the IMF but did not talk about it publicly because of fears of a backlash.   It avoided riots but it didn’t help him as president.

The fact is, too much is said in Egypt (not just regarding the economy) for it to be retracted, altered, transformed, or just simply revoked.   We don’t want grand, but fleeting comments that have no spine.  If there are no plans for a currency devaluation, the central bank should corroborate this in a formal statement to end a year of speculation.

Turns out, quite a few put their hands up.  Here’s an interesting [edited] note from Emad Mostaque, chief strategist at Religare Capital Markets, on why no devaluation is a good thing:

Looking to get dollars through tourism, encouraging FDI, which should come through as Egyptian structure pretty much the same as pre-revolution and main power groups pretty much aligned.

I had expected at worst a gradual 5-7% annual devaluation, but my central case has always been no devaluation due to its political sensitivity and the difference between this and other devaluation scenarios (the representativeness heuristic in behavioural parlance) that the market seemed to have glossed over.

Egypt is backed up by the GCC and USA, two of the largest dollar holders in the world. You only get forced devaluation if there’s nobody to swap your local currency to dollars along with a few other stress factors. Not the case here and we’re missing most of the stressors that precede a forced devaluation like severe capital controls and a grey market.

Export competitiveness isn’t that high on the agenda right now, its not like we had a sudden spike in inflation and that scared off all those foreign investors. Foreign investors are rather looking for stability and adherence to the rule of law. The locals are looking for cheap bread, a return of the tourists in a safe environment and support for SME growth. Large industry is fine given the build up in local demand and low recent capacity utilisation during the crisis.

Outlook looks good over the next few years with both the Muslim Brotherhood and Salafist parties saying the $4.8bn IMF loan is fine, with real difficulties being 3-4 years out as growth won’t quite keep up with local demand and a shift from local to foreign debt may prove an issue depending on how the eurozone pans out.

Maintain strong buy on Egypt, CIB and Telecom Egypt being our favourite stocks at 30%+ discount to fair value and likely to remain uncorrelated with global markets.


  • Posted August 29, 2012 at 7:48 am | Permalink

    Devaluing the EGP won’t cause net gain for the economy as traditional textbook economics says. Egypt has a huge trade deficit that will result in markable increases in the prices of imports, and according to empirical work even Egyptian exports depend on imported inputs which will still raise export prices. Not to mention gradual lift of electricity subsidies (which will add to inflation), devaluing the currency is political and economic suicide.

    • Posted August 29, 2012 at 10:57 am | Permalink

      It appears like there is a general divide between foreign investors and foreign economists, who are calling for a devaluation because of claimed export benefits etc, and Egyptian investors/economists who see it as detrimental for the country… would you agree or too much of a generalisation?

      • Posted December 23, 2012 at 5:16 pm | Permalink

        Just so this. I have no idea of where the investor arguments stem from. My comment was based on empirical evidence presented by AUC’s Dr. Hala El Ramly and Sahar Abd Elhalim in a 2004 paper.

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