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MIDEAST WEEKAHEAD-Egypt share gains hinge on clearer policy signals

Wednesday, 10 Oct 2012 | 10:29 AM ET

By Tom Pfeiffer

CAIRO, Oct 10 (Reuters) - Egyptian stocks seem unlikely to resume this year's world-beating rally until the government shows how and when it will begin cutting fuel subsidies to rein in the budget deficit and secure a $4.8 billion IMF loan.

Mixed messages on the long-awaited reforms and a shifting timetable for an IMF deal have kept investors on tenterhooks for weeks since a new government signalled a new resolve to stabilise its finances and revive inward investment.

A surge of more than 50 percent in Egypt's main share index

since President Mohamed Mursi took office in June was driven mostly by retail investors optimistic that the country is emerging from an economic crisis sparked by last year's popular uprising, thanks partly to aid from Gulf states.

But foreign investors and many local institutions say they need to know more on the timing and detail of subsidy reform - key to any revival in private investment - and are frustrated by mixed messages from officials.

They also worry about government plans unveiled at the weekend to revise past investment contracts if they represented a poor deal for the state.

Investment Minister Osama Saleh said the reviews of land sale deals and other contracts would not harm investors. But the plan has unnerved investors who believed a wave of legal challenges to deals signed by state officials under former President Hosni Mubarak had been largely settled.

Osama Mourad, Chairman of Cairo-based Arab Finance Brokerage, said at an investment conference that he was "deeply disappointed" by the probes first outlined by President Mursi in a speech at the weekend. Egypt's main share index slipped 2 percent on Monday although it has now rebounded.

Some investors are sceptical that the government will meet its latest deadline for an IMF deal.

"The core issue is still the economy. The government is good at sweet talking but subsidies need taking care of," said Teymour el-Derini at Naeem Brokerage. "Let's say the IMF doesn't happen in October, what will happen then? I'm pretty sure it won't, knowing how this country is."

Derini said he expected retail investors to continue pushing up specific stocks based on unconfirmed speculation, but that "we're going to go sideways for now whatever happens.

Finance Minister Mumtaz al-Saeed told Reuters at an investment conference in Cairo on Tuesday that the government hoped to seal an IMF deal within two weeks after negotiations set for the end of the month. This encouraged some investors.

A fixed-income analyst in Cairo said he expected treasury yields to tick higher in coming days before resuming their declines from historic highs on optimism that Egypt is closing in on an IMF deal despite the uncertainty over economic reforms.

"The IMF deal is now expected to be signed in early November and we expect Egypt to get $1 billion as a start," the analyst said. "Along with a Turkish aid deposit and government talk of sukuk (Islamic bonds), this will definitely affect yields."

He said fixed-income rates were likely to fall until the end of the year but would first tick higher at auctions in the coming week.

The Egyptian pound has fallen 4.5 percent since the start of last year's uprising. Economists say the drop would have been far deeper if the central bank had not defended the pound's value.

"Reserves are touching $15 billion. The only way to hit the economic problem is to hit subsidies and everyone knows it," said an equity trader in Cairo.

Analysts say Egypt needs to maintain foreign reserves of at least $15 billion to shore up the pound. Reserves have plunged by more than half since the popular uprising in January 2011 scared away tourists and investors, two key sources of foreign currency.

(Additional reporting by Shaimaa Fayed; Editing by Susan Fenton)

((thomas.pfeiffer@thomsonreuters.com)(+202 2578 3290)(Reuters Messaging: thomas.pfeiffer.thomsonreuters.com@reuters.net))

Keywords: MIDEAST WEEKAHEAD