Additional Aid Will Further Deter IMF Deal

BMI View: The additional US$4bn in aid pledged by the UAE will provide further support to the Egyptian economy and the interim government. On a political level the assistance will negate the impact of the US' decision to reduce military aid as well as pushing back any deal with the IMF until mid-2014 at the earliest. In addition, the money will help provide support to the currency over the short term.

The UAE's decision to provide another US$4bn in assistance to Egypt will provide further support to the currency and give additional breathing space for the interim government. The UAE signed an agreement with Egypt worth US$4.9bn, however US$1bn of this had already been pledged. More than US$1bn of the assistance will be used on fuel, while much of the remainder will fund development projects including the construction of 15 wheat silos with a capacity to store 15,000 tonnes each.

Significant Political Impact

Further Gains On Their Way
Egypt - Net Foreign Reserves (US$bn)

BMI View: The additional US$4bn in aid pledged by the UAE will provide further support to the Egyptian economy and the interim government. On a political level the assistance will negate the impact of the US' decision to reduce military aid as well as pushing back any deal with the IMF until mid-2014 at the earliest. In addition, the money will help provide support to the currency over the short term.

The UAE's decision to provide another US$4bn in assistance to Egypt will provide further support to the currency and give additional breathing space for the interim government. The UAE signed an agreement with Egypt worth US$4.9bn, however US$1bn of this had already been pledged. More than US$1bn of the assistance will be used on fuel, while much of the remainder will fund development projects including the construction of 15 wheat silos with a capacity to store 15,000 tonnes each.

Further Gains On Their Way
Egypt - Net Foreign Reserves (US$bn)

Significant Political Impact

The additional aid from the UAE will further reduce political will for concluding, or even continuing, negotiations with the IMF. With the extra US$4bn pledged by the UAE, a total of US$16bn has been pledged to the Egyptian government since July. This has relieved the pressure on foreign reserves, which reached US$14.9bn at the end of June - covering just three months of imports. Therefore, even though the interim government is facing a budget deficit of around US$3.2bn a month, equivalent to almost half of state spending, they appear content to maintain the status quo and thus we do not expect talks between Egypt and the IMF to recommence until mid-2014 at the earliest.

As we previously highlighted, the Gulf's assistance to Egypt negate any impact of the US decision to withdraw much of its aid to the country (See 'Aid Cut-Off To Have Minimal Economic Impact' October 10). The amount withdrawn by the US is unclear, however, it is believed to be in the region of US$800mn - a figure dwarfed by the amount pledged by Saudi Arabia, Kuwait and UAE since the overthrow of President Mohammed Morsi in July.

Staying Flat
Egypt - Exchange Rate, EGP/US$

Pound Stabilised, For Now

The boost to foreign reserves has, and will continue to, support the exchange rate. The currency was trading at EGP6.8912/USD on October 29, having traded sideways for the past six weeks. Indeed, anecdotal evidence indicates that the black market for Egyptian pounds has virtually disappeared, pointing to increased confidence in the economy from ordinary Egyptians. We expect the exchange rate to remain around this level for the coming weeks. However, depreciation will resume around Q114 as the economy begins to worsen, with confidence in a post-revolution bounce evaporating.

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This article is tagged to:
Sector: Country Risk
Geography: Egypt, United Arab Emirates
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