• We don’t think CBE comments imply an imminent EGP major move… In an interview yesterday with local newspapers, the Central Bank of Egypt (CBE) Governor Tarek Amer said his monetary policy does not target the exchange rate, but instead focuses on price stability (10% inflation in the medium term) and employment. Amer added that he personally would prefer to see higher industrial utilisation than a stable EGP. We see the statement as reiterating the policy stance he has held since he assumed office in November 2015, notably his relaxation of FX deposit limits and steps to allow the parallel market to operate relatively freely. Amer also argued that FX shortages were a reflection of a bigger economic problem, namely a widening fiscal deficit which boosts demand and hikes inflation. He added that economic reform would receive a boost with the approval of the FY16/17 budget, likely hinting that a major FX adjustment may therefore follow fiscal reforms such as the introduction of VAT.
• …as liquidity needed for sustainable EGP adjustment While, Amer’s comments may imply a move in the EGP in the short-term, we reiterate our view that any devaluation that takes place before the CBE has built up liquidity buffers - i.e. foreign reserves sufficient to stabilise the FX market after devaluation – would be unlikely to yield sustainable improvements in the FX market. Ultimately, the structural challenges facing Egypt – uncertain global demand, the ongoing tourism slump, shortfalls in domestic energy supply - needs a new currency regime to be established in which ultimately the rate is formed by the interbank market. Just a weaker EGP is not enough, and a devaluation in the short term without additional steps risks creating another wave of inflation without addressing the underlying drivers. We continue to think that an IMF programme is likely to play a key role in increasing the reserve cushion while instating a credible framework for the currency – possibly a basket linked to currencies of Egypt’s key trading partners as we hinted earlier.
• Public banks listing in 1Q17; keeps year-end USD25bn reserve target Amer stated the CBE is still committed to its plan to list a couple of state-owned banks, though the target date has been pushed to 1Q17. The government plans to list 40% of Arab African International Bank (in which the CBE and the Kuwait Investment Authority each own 49%) and 20-30% of wholly-state-owned Banque de Caire, according to Amer. Despite this delay, the Governor said that he was sticking to his end-year foreign reserve target of USD25bn, partially relying on a planned USD3bn Eurobond to be sold in September, highlighted by the Finance Minister last week. Egypt’s foreign reserves stand at USD17.5bn, up from USD16.4bn at the end of 2015.

Mohamed Abu Basha