'Markets Are Wrong' on Egypt Foreign Reserves: Analysts

Democracy is “well within reach” in Egypt and has “significant upside potential” in the medium term, Renaissance Capital said in its latest report. It expected investments to increase after the country’s presidential elections, scheduled for later this month.


Although economic growth for the Arab World’s most populous country came in less than Renaissance Capital had hoped, it argued that activity shifted to the grey (informal) economy, and that headline numbers “look worse than they really are”. It projected growth to pick up in the second half of the year. The International Monetary Fund (IMF) has forecast gross domestic product to expand by 1.5 percent this year, and 3.3 percent in 2012.

“Markets are wrong,” the report goes on to assert, about Egypt’s falling foreign currency reserves. While calling into question the role of reserves and what levels are adequate, it also pointed out that most Egyptian households still had their savings in Egyptian Pounds.

“We admit reserves are close to dangerous levels, but then again, using the IMF’s new metric for adequacy of reserves, we believe if markets are to worry about Egypt then they should worry about South Africa and Turkey as well,” it pointed out.

Renaissance Capital disagreed with suggestions the Central Bank of Egypt (CBE) would be forced to devalue the local currency. Last month, data from the CBE showed that reserves fell from $15.72 billion in February to $15.12 billion in March.

This translates into a loss of over 50 percent versus a year earlier, with the central bank believed to be using the dollars to defend the value of the pound. But contrary to what other analysts have been saying, the report maintained it was money “wisely used” as it kept inflation in check and protected local savings.

The Egyptian pound traded at 6.04 against the U.S. dollar , early Tuesday, marking a depreciation of 4.2 percent since January 2011.

Meanwhile, the outcome of negotiations with the IMF for a $3.2 billion loan remains unclear after parliament rejected a revised economic plan in late April. The IMF said in a statement its support would come assuming “the necessary broad political support and includes adequate external financing from Egypt’s international partners”.

“The amount seems to be $3.2 billion, with late May as the time line, which would help reserves and restore market confidence," Renaissance Capital said. But, it added, $3.2 billion is "a drop in the ocean" for the government’s expected budget shortfall of $23 billion at the end of this year.

Last week, rating agency Moody’s extended its review for possible downgrade of Egypt’s B2 credit rating, citing among other factors that negotiations with the IMF and the availability of external support from Gulf states have “evidently become contingent on the upcoming presidential elections”.

Egypt's stock market remains among the world’s top performers, up 36.5 percent so far this year. Still, Renaissance Capital retained a “cautious stance” in the short-term, arguing that the “sweet spot” would be a combination of a lower budget deficit and higher savings, seen unlikely in the coming six months. The Market Vectors Egypt ETF in the US has seen similar returns with 33.9 percent.


Yousef Gamal El-Din is CNBC's Middle East Correspondent and contributes to the channel’s flagship shows, as well as analysis for CNBC.com.

Stay in touch with him on Twitter at http://www.twitter.com/youseftv @youseftv