CAIRO - 29 February 2024: Even with the Ras El Hikma investment, Egypt still needs the support of the international Monetary Fund (IMF) or risk going back to square one on the path of economic reforms, Capital Economics said in an analysis report.
Middle East and North Africa Economist at Capital Economics, James Swanston, noted that even before the Ras el Hekma deal, investor sentiment towards Egypt had improved in recent months on the back of hopes that a new IMF deal will soon be secured.
“But there have been suggestions that the United Arab Emirates’ (UAE) support reduces the need for a deal with the Fund,” James said.
James reviewed the previous support given by the Gulf states to Egypt in 2013 through the provision of $23 billion in financial aid. In March 2022, Saudi Arabia, Qatar, the UAE, and their respective sovereign wealth funds pledged an additional $22 billion in support.
According to James, this likely contributed to the extended negotiations with the IMF, which began in March and concluded with a staff level agreement in October.
The Economist stated that Egypt still requires IMF support, considering the extensive negotiations and the essential need for Egyptian authorities to adopt more orthodox policymaking to enhance the country’s long-term prospects. “That said, the size of the currency adjustment may now be smaller and the conditions attached to the IMF deal less stringent than would have been without the Ras el Hekma deal.”
The analysis reviewed that the ADQ has purchased the development rights to Ras el Hekma for $24bn and will invest an extra $11bn into the project from existing deposits of the UAE at the Central Bank of Egypt. The net result is an inflow of $24bn in direct investment, some of which President al-Sisi has said has already been received with another tranche due tomorrow.
It noted that the market reaction to the deal has been very positive. Sovereign dollar bond spreads have narrowed by 200bp since the deal was announced, to ~650bp, and are at their lowest levels since late-2021.
In addition, the Egyptian pound has appreciated by 25 percent against the dollar back to 51/$ on the parallel market as hopes that these inflows will help to ease the severe FX liquidity crunch in the economy.
Prime Minister Mostafa Madbouly confirmed on Thursday that Egypt received $5 billion from the first installment of the investment partnership deal with the UAE to develop Ras El Hikma with another $5 billion expected to arrive on Friday.
Madbouly added that measures will be taken to convert $5 billion from the UAE deposit to Egyptian pounds (EGP).
On Tuesday, the IMF’s Managing Director, Kristalina Georgievam announced that the Fund resolved major issues with Egypt in its review of its $3 billion loan program, adding that an additional financing package would be finalized within weeks, but she didn’t disclose the size of the expected increase in the additional financing.
She noted in statements on the sidelines of a G20 finance meeting in Brazil that the engagement had been "very constructive" and there were "very encouraging signals" about Egypt's views on dealing with heritage issues that had affected its competitiveness.
The IMF had postponed the two reviews of Egypt's current program, agreed upon over a year ago, awaiting authorities to allow a more flexible exchange rate and fulfill other promises before receiving additional funds. Georgieva affirmed that the discussion with Egypt is about a flexible exchange rate and not "floatation."
Reaching an agreement with the IMF and development partners would contribute to lifting Egypt out of its worst economic crisis in decades, especially with the urgent need for economic stability in the face of Israel's war on neighboring Gaza.
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