Breakfast Wrap: Why “Quick Wins” Fail, Egypt Finance Explainer

Egypt’s prime minister was on a rare hour-long conference call with investors yesterday where he repeated the mantra that the country is working to jumpstart the economy and revive important sectors such as tourism.

He also reaffirmed that there would be no currency devaluation “at the moment”.  Instead he said “we are aiming within three months to create quick wins on the ground“.

Rebel Economy has warned before that “quick-wins” are never successful or sustainable.  A case in point is the “Morsi-meter”, established to show President Morsi’s performance in his first 100 days, but shows only 4 promises out of 64 have actually been achieved after 80 days in power.

The public is not looking for quick wins or fast solutions to chronic problems like inefficient, unequally distributed energy subsidies.  The public is looking at how the government can make shrewd decisions that turnaround the fortunes of the country and pass on resources to the neediest.

An excellent article this morning from Bloomberg’s Ahmed A. Namatalla and Nadine Marroushi lays out the main indicators readers should be looking at regarding Egypt’s currency and fiscal concerns. I’ve broken down the most important elements of quite a technical article.  My notes are in blue, the rest is quoting from the story:

  • Egypt’s move to allow the pound to weaken gradually in the last three months has helped relieve investor concern that the currency’s decline will be disorderly.  Egypt’s central bank has pumped billions of dollars of foreign reserves to stabilise the currency.  For this reason the pound is only down 4.5% since the start of last year’s revolt, compared with drops of 9.1 percent in Tunisia’s dinar and more than 15 percent forIndia’s rupee and South Africa’s rand.
  • The currency, which traded at 6.0898 a dollar yesterday, will weaken to 6.48 a dollar by the end of September 2013, according to the median estimate of four analysts compiled by Bloomberg.  Economists and analysts still forecast a depreciation in the currency as the central bank continues its managing of the pound while foreign reserves remain at very low levels (remember foreign reserves stood at $36 BILLION before the revolution – now they are at just about $15 billion). 
  • The cost of insuring the nation’s debt against default for five years plunged 320 basis points, or 3.20 percentage points, to a one-year low of 403 yesterday.  Simply, this is a gauge of riskiness in a particular country or company.  The more it costs to insure against a default, the more financially unstable the country is.  
  • The Finance Ministry sold its first two-year floating-rate bonds on September 16 at an average yield of 15.39 percent, to be adjusted every six months.  Buying these bonds allow investors to minimise their interest rate risk and support the government’s fund-raising programme.
  • Meanwhile it allows the government to diversify its debt instruments and its investor base.  It’s one more on the list of instruments the government is selling to plug a twin deficit in its budget and balance of payments.  
  • The yield on local-currency treasury bills plunged to 10-month lows at the most-recent sales as Egypt secured pledges for $4 billion in financial support from Qatar and Turkey in the past six weeks.  Yields have fallen as confidence returns to the country and investors with billions of dollars being promised to Egypt and near-closure on an IMF loan.   That means it’s cheaper for the government to repay the yields on these bills (banks buying up bills and bonds are buying debt). 

Despite Bloomberg’s quite optimistic evaluation that Egypt is back on track, Rebel Economy believes a weak pound is just another reflection of the dwindling pot of reserves that the central bank may not be able to control.

As Said Hirsh, economist at Capital Economics points out in the same article: “The central bank doesn’t have enough power to keep it at that, so it is allowing it to gradually drop. Many investors would like to see some kind of devaluation.

Some investors are still steering clear of Egypt for fear of a sudden drop in the value of the pound that would wipe out the generous returns being seen on the market.

Egypt’s state oil firm EGPC has issued a tender to import up to 4.5 million barrels of crude oil in the fourth quarter, a document showed on Monday, as the oil importer seeks to stave off fuel shortages.

Egypt’s cash-strapped government owes foreign energy producers at least $4 billion, as cancelled import tenders and lengthening queues at petrol stations point to fresh strains on fuel supplies.

In the latest labour movement development, a maids’ syndicate has formed to fight for domestic workers’ rights, according to an Al Ahram article.  With a monthly subscription of only 80 US cents, the syndicate has already garnered 300 members and expects to reach 2,000 by the end of the year, Al Ahram reports.

Egypt’s growing labour movement shows that the country’s massive labour force is expecting more from its new government.  There are no more excuses.

From a corporate perspective, however, it is important to note that this movement threatens Egypt’s competitiveness as a cheap labour market with labourers asking for salary increases.

The Financial Times’ Tobias Buck, usually reporting on Jordan, Jerusalem and Israel was in Ramallah and wrote this report on the Palestinian’s first planned city, Rawabi, which is being managed by Qatari Diar, the real estate arm of the Qatar Investment Authority.  This project has been going on for sometime but this piece is a good update on the project.

Quite an interesting little nugget of news on the controversy surrounding the work of Iranian artist Farhad Moshiri.

Ernst & Young and UAE brokerage Arqaam Capitalaccused of accountancy misconduct over the value of Iranian artwork, reached a deal with the regulator of Dubai’s financial free zone hours before the case would have gone to court yesterday.

The Dubai regulator said the treatment of artwork in Arqaam’s 2009 accounts did not comply with accounting standards, overstating operating income by 42 percent and understating its loss for the year to end-June 2009 by 21 percent, a court document said.

E&Y, as auditor, had signed off on the accounts.  Tsk, tsk.

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