• IMF issues detail-light statement, mentions flexible FX regime The IMF issued a statement announcing a staff-level agreement with Egypt for a three-year USD12bn Extended Fund Facility. As expected, the statement gave only a general overview of the reform programme, which will focus on moving towards a more flexible exchange rate regime and reducing the budget deficit and government debt. The latter is targeted to reach 88% of GDP by 2018/19 from its current level of 98%. The statement also said that social protection was a cornerstone of the reform programme as well as measures to improve the business environment. We are UW on the market for USD investors – we recommend foreigners wait for devaluation before buying local shares, but they should buy GDRs in COMI.
• A few weeks and several steps before money is disbursed The staff-level agreement is not a final one, and the disbursement of the loans’ first tranche remains conditional on implementing a number of measures – likely led by VAT and possibly including a cut in energy subsidies – and the ratification of the agreement by the IMF board and Parliament. We expect the first money to arrive around the second half of September, with the gov’t reportedly targeting a USD2-2.5bn first instalment. We do not believe the authorities will be able to amass a large financial buffer (potentially USD2-2.5bn from the IMF and USD1.5-2bn in Eurobonds) before the second half of September. As such we do not expect EGP to devalue before then. The key risk to this base-case timetable would be the gov’t receiving funds from other sources, led by the GCC.
• IMF stresses importance of support from ‘Egypt’s friends’ In any case, the IMF’s statement mentioned that “it would also be very helpful for Egypt’s bilateral partners to step forward at this critical time.” This confirms our view that GCC support will be sought for the programme in order to boost Egypt’s sources of funding its deficit – we see an external financing gap of cUSD30bn for the next three years. The government has reportedly been in discussions with the GCC for a renewed round of financial support ahead of an EGP adjustment. However, some funds pledged by GCC countries earlier in the year have not yet arrived.
• Primary surplus targeted by end of IMF programme One of the few details from today’s press conference is that the programme targets a primary surplus, rather than a fiscal one, due to difficulties associated with forecasting interest payments, according to the IMF’s mission chief Chris Jarvis. The programme aims for a total improvement in the primary balance of 5.5% of GDP, implying a 2.0% surplus by 2018/19 from expected 3.5% deficit in 2015/16.

Mohamed Abu Basha