CAIRO - 14 June 2023: Goldman Sachs held an investor trip to Egypt during the first week of June, where the team met policymakers, analysts and local market participants.
Upon this trip, Goldman Sachs issued an economic research concluding the results of those meetings.
The key notes of the trip were that the authorities have a strong preference to order reforms such that asset sales precede a move towards FX flexibility.
The research quoted the Egyptian authorities’ view saying that asset sales will provide the necessary liquidity buffer to lean against a potential overshoot of the Pound under a more liberal FX regime and enable the orderly transition to a unified, market-clearing exchange rate.
The research expected that the CBE would need in excess of $5 billion in FX resources for this purpose. Meanwhile, the prospects of a devaluation are low.
The Goldman Sachs foresaw that it will be challenging for the authorities to accumulate sufficient FX buffers for an orderly transition to greater FX flexibility.
It said that with the FX flexibility being a key requirement for the IMF to conclude the first review under the current programme, this raises one of two likelihoods.
The research elaborated that the authorities prioritize adherence with the conditions of the IMF programme, liberalize the FX market in the absence of their desired liquidity buffer, and risk a significant depreciation of the Egyptian Pound.
It added that IMF reviews get delayed indefinitely, with risks to programme continuity. The research does not believe the IMF is prepared to waive the requirement for Egypt to liberalize the FX market in order to conclude the reviews.
Furthermore, it expected the pace of the asset sales to be slow, believing that a recent flurry of activity is likely to lead to some asset sales in the coming weeks, but the pace of the asset sale programme will remain modest given structural impediments, according to their anticipations.
According to external financing, the research said that in the absence of a higher volume of asset sales, we think concerns around a potential overshoot of the currency will impede transition to a flexible exchange rate regime, raising risks to the IMF program and the broader financing outlook.
“Further current account adjustment will be necessary to manage external financing risks, but we believe three factors mitigate risks to external creditors: (i) a strong willingness to pay, (in) a relatively low commercial external debt burden, and (iii) a low likelihood of social instability,” it added.
It also expected a further pull back on the pace of implementation of state-led infrastructure projects, which it believes are adding to pressure on scarce FX resources.
Answering how much liquidity the CBE needs, it stated the CBE requires a 'war-chest' of around $5b in unencumbered FX reserves which it can deploy to manage an orderly transition to a more flexible FX regime.
“This roughly corresponds to the FX backlog in the banking system (pending LCs and IDCs), but is not likely to meet the totality of Egypt's FX overhang,which is estimated between $15 billion and $18 billion,” the research said.
This amount includes the FX-denominated arrears the authorities have accumulated to various suppliers. “The biggest of these is to the international oil companies, where we heard payments have been greatly reduced (if not stopped) since Russia's invasion of Ukraine in February of last year,” it clarified.
It expected that pricing Egypt's off-take of domestic gas production at between $4/mbtu and $5/mbtu; dues to international oil companies since February of last year, should amount to around $7 billion-$8 billion.