x Abu Dhabi, UAETuesday 23 January 2018

Challenging road to recovery

Egyptian policymakers face a stern test this week to get the economy back up and running

Egypt's ability to get its economy back on track is expected to face two significant tests this week.

First, the government's capacity to fund its budget deficit will come under scrutiny with the reopening today of debt sales after a week-long interruption caused by protests.

In addition, the regulator may have to decide whether to adjust monetary policy if inflation data for last month, due to be released on Thursday, shows a rise in consumer prices.

"The restart of treasury bills auctions is important, as Egypt needs to maintain confidence in its sovereign stability," said Mark McFarland, an emerging markets economist at Emirates NBD.

He said the Egyptian pound would come under further pressure if evidence of a rise in market risk premiums emerged. The pound weakened to its lowest level in six years yesterday.

The central bank said it would today auction 15 billion Egyptian pounds (Dh9.4bn) in treasury bills, with a settlement date of tomorrow.

Short-term treasury bills are an important financial tool used by the government to plug the country's budget deficit and pay for infrastructure projects.

Before the recent political unrest, officials had hoped to trim the deficit from 8 per cent to 7.7 per cent this year.

Moody's Investors Service last week downgraded Egypt's bonds because of concerns that instability could dent public finances. Standard & Poor's also cut the long-term foreign currency debt rating on Egypt.

Policymakers may face another headache if signs emerge on Thursday of escalating price inflation.

Any rise in core inflation - the inflation rate minus food and energy - could put pressure on the regulator to tweak monetary policy. Concern about rising consumer prices has been among the catalysts for street demonstrations across the country in the past week.

Lending rates have remained unchanged since September 2009, despite signs of a recent improvement in core inflation. It rose to 9.7 per cent in December from 8.9 per cent the previous month.

"The last thing the [central bank] wants right now is a rise in non-food inflation, thus forcing it into a corner where there is no option but to raise interest rates at a time of political convulsion," Emirates NBD said in a research note yesterday.

Evidence is emerging of the toll the mass protests and curfew have already taken on the economy. On Saturday Samiha Fawzi Ibrahim, the trade minister, said Egypt's exports fell 6 per cent last month.

Exports stood at 7.7bn pounds, down from 8.2bn pounds, she said. However, she did not specify whether the comparison was with December or January last year.

The central bank moved 5bn pounds of cash into the financial system as depositors regained access to their savings yesterday.