Without IMF deal, investors wary of Egypt

By Tom Pfeiffer

CAIRO, Oct 3 (Reuters) - A trickle of foreign donor aid looks like Egypt's best hope of averting a balance of payments crisis for now because many of the investors who fled the country last year are loath to return until the government seals a loan from the IMF.

A deal with the International Monetary Fund would lend vital credibility to a new Islamist-led administration desperate to revive inward investment that ground to a halt after last year's popular uprising against Hosni Mubarak.

"Until the IMF deal is signed, you are still going to have a lot of people on the sidelines waiting for that stamp of approval and that policy backstop," said Antony Simond of Aberdeen Asset Management, which is not investing in Egypt.

The IMF wants the government to push through subsidy reform and other potentially unpopular measures to rein in a yawning budget deficit before it advances the $4.8 billion loan.

But hope has been fading that President Mohamed Mursi's cabinet will move fast to impose the complex, risky reforms just months before expected parliamentary elections, then see them applied effectively by a sprawling, lethargic bureaucracy.

The IMF talks were delayed last week and will resume in the last week of October, Prime Minister Hisham Kandil said on Wednesday. An IMF delegation had been due to arrive in Cairo in late September but the government said it needed more time to draw up the reform plan.

"With (foreign) reserves running at little more than three months of import cover, any material delay in concluding talks would likely see confidence rapidly wane and downward pressure on the currency quickly resume," said HSBC in a recent note.

The mass of investors still avoiding Egypt - partly because of lingering fear of a sharp currency devaluation - have missed out on a dizzying 55 percent surge in stock prices and tumbling treasury yields since the government took office.

It came as Arab Gulf states began honouring pledges of support, stemming an erosion in Egypt's foreign reserves, and the government signalled a new resolve to lure investors.

A resurgence of street protests in Cairo last month, prompted by a film denigrating the Prophet Mohammed, did not spark the kind of prolonged, deadly violence often seen in the year following the overthrow of Mubarak in February 2011.


Foreigners who wound down their Egyptian-pound treasury bill holdings between the uprising and May this year became net buyers again in June, central bank data showed.

Asset managers including Invest AD of Abu Dhabi and Silk Invest were already invested in Egyptian equities during the turbulent period of army rule after Mubarak's overthrow.

Silk holds local-currency corporate bonds and shares such as investment bank EFG Hermes , which has dollar-based fee revenue and therefore less exposure to local currency risk.

"When you look through the noise, the country is going in the right direction," said Daniel Broby, Silk's chief investment officer, citing elections, Mursi's move to limit the military's power, less corruption and better allocation of state resources.

"You still have the IMF to step up to the plate, but funding coming from other sources is showing they can muddle through for now," he said.

Invest AD has ramped up its presence since the start of the year, focusing on consumption-linked stocks given the long-term growth prospects offered by a fast-growing population, said its head of asset management, Mohammed al-Hashemi.

Egypt's 2020 international bond yield last month fell back to its pre-uprising level of under 5.2 percent after reaching as high as 8.3 percent in January.

Fixed-income dealers in Cairo said participation by foreigners, most of them Westerners, at debt auctions had risen again in September as optimism grew that yields had peaked at historic highs before the new government took office.

"The market was used to foreigners targeting the secondary market for their purchases. What's different this time is their targeting of primary auctions," said a fixed-income analyst in Cairo.

Dealers said foreigners were targeting mostly six-month and nine-month tenors at debt auctions, aware that local banks were charging hefty premiums for the debt in the secondary market.

In T-bill auctions on Sept. 4 and Sept. 11, the 182-day and 273-day tenors had the highest bid-cover ratios.


Non-Egyptian investors have accounted for between 15 and 30 percent of equity market activity in recent weeks, said traders. But they said foreigners were yet to return in the numbers seen before last year's uprising.

Local retail investors had powered the recent rally, motivated more by optimistic government statements than any concrete signs of economic revival such as a foreign company announcing a major investment, traders said.

"People are asking "where is the money?"" said Osama Mourad, CEO of Arab Finance Brokerage, "And we are starting to see a lot of contradicting statements in the government."

The news of the IMF delay sent a shiver through the stock market on Monday, pushing the benchmark index down 3 percent, its biggest one-day drop since July.

Acquisition advisers still see only limited interest in Egyptian assets, especially consumer-oriented businesses.

"It is still pretty dead but it is seeing some signs of life," said one senior manager at an Egyptian investment bank.

Arab banks have shown interest in buying Egyptian operations of two French lenders - Societe Generale and BNP Paribas .

Successful sales may suggest some improvement in the investment climate but, with the assets merely changing foreign hands, will do nothing to improve Egypt's balance of payments.

With most investors in wait-and-see mode and tourism in the doldrums, Egypt's best shot at avoiding a renewed economic crisis is still an IMF loan.

But the reforms that is likely to require, and suspicion of the Washington-based institution among some in Egypt's political class, mean a deal is still not assured.

"Any delay (in tackling wide budget and trade deficits) could jeopardise IMF support, triggering renewed pressure on rates and the currency and rapidly reversing the recent improvement in the near-term outlook," HSBC said.

(Additional reporting by Carolyn Cohn in London; Editing by Susan Fenton)