A presidential bid by General Al-Sisi would be “market-friendly” in the near future; however, assistance from the Gulf Cooperation Council (GCC) and the International Monetary Fund (IMF) will still be needed for maintain macro stability during the second half of 2014 (2H14), Bank of America Merrill Lynch said in its latest report.
The wealth management division of the bank said that Egypt’s $3.7bn in external debt obligations in 2H14 cannot be served without pressuring foreign reserves.
“Despite recent FX moves ahead of a potentially volatile 1H14, we do not see material EGP weakening beyond 7.0 prior to the elections,” the report read.
The leading financial institution said that it believes the GCC’s support will continue to be made available if needed.
“The Egyptian political transition is likely to be complete in 2014 but could result in a watered down version of the pre-revolution regime, in our view,” the report said, adding: “This will likely weigh on growth and keep fiscal and external financing vulnerabilities high”.
The report stated that on the condition that GCC aid continues and the political transition is completed, international credit rating agency Moody’s is expected to bring Egypt’s outlook to stable, an improvement from the current negative outlook, and upgrade its Caa1 sovereign rating by one notch to reach B3.
Earlier last month, Moody’s issued in a report in which the agency maintained a negative outlook for Egyptian banks.
“Against the backdrop of the unsettled security situation and political climate, the banks’ operating environment will remain difficult,” said Constantinos Kypreos, Senior Credit Officer at Moody’s Investors Service. “This is because the outlook for foreign investment, tourism and consumer confidence remains weak, leading to subdued credit growth and low business generation for banks.”
Merrill Lynch forecasted that gross domestic production will grow by 3% in the 2014 fiscal year, which will be driven by fiscal stimulus spending.
The Ministry of Finance announced on 1 March that it expects real GDP to grow by 3.5% by June 2014. The ministry added that it expects the budget deficit to decline to below 6% of GDP over the medium term and public debt to fall to 74% of GDP by 2018.
The Merrill Lynch report mentioned that negotiations with the IMF are not expected to resume in 1h14. It added that it expects the Central Bank of Egypt to maintain a tight grip on the Egyptian pound.