In August the International Monetary Fund announced it had reached an agreement with the Egyptian government for a $12 billion bailout that would ideally kick-start some much-needed economic growth. The three-year lending program, aimed at easing the pain of the government’s reform agenda, currently hangs in limbo as the IMF’s executive board has yet to sign off on it. On Thursday the central bank devalued its currency by 48 percent to meet a key requirement for the loan, but Egypt must still raise up to $6 billion in bilateral financing.
“With the implementation of the government reform program, together with the help of Egypt’s friends, the Egyptian economy will return to its full potential,” Chris Jarvis, the IMF’s mission chief for Egypt, said in an August statement announcing the loan agreement. “This will help achieve inclusive job-rich growth and raise living standards for the Egyptian people.”
Since the 2011 Arab Spring uprising that put an end to Hosni Mubarak’s 30-year reign, Egypt’s economy has been circling the drain. By the end of that year, the Egyptian EGX 30 Price Return Index had dropped over 36 percent and capital flight had slashed the central bank’s foreign reserves by two-thirds, to $12 billion.
In 2013, former Defense minister Abdel Fattah el-Sisi seized power from his Islamist predecessor Mohamed Morsi, elected in 2012. This year, Sisi started down a path of tax hikes, currency devaluation, and subsidy cuts demanded by the IMF in exchange for the funding program.
While reserves have since bounced back above $19 billion — largely due to aid from Gulf monarchies — unemployment has topped 13 percent and a scarcity of dollars in the country, combined with a nosedive in the black-market value of the Egyptian pound, has led to a shortage of consumer staples. “Before the president was elected we had enough sugar, coffee, and rice,” an unnamed tuk-tuk driver said in an Al-Hayat television segment in October that quickly went viral with over 4 million views on Facebook. “What happened?”
Despite the potential for the IMF loan, investors are right to remain cautious. Boston-based Acadian Asset Management has shunned broad exposure to the Egyptian market in favor of an opportunistic approach, seeing attractive valuations in the consumer products and telecommunications sectors. “I think the deval and the IMF package could be a material catalyst to growth,” says Asha Mehta, Acadian’s lead portfolio manager for frontier markets. “But that may take longer than some investors expect.”