Hisham Ramez’s moves towards a floating exchange rate in January and June place the country on a more sustainable footing as it reforms its fiscal management and re-establishes its presence in global markets
More than three years after the Arab Spring, Egypt is the country in the Middle East and North Africa that has appeared, over the past year, to make most progress on its economy, says Mohieddine Kronfol, regional fixed income and global sukuk chief investment officer at Franklin Templeton Investments. That is partly down to the work of Central Bank of Egypt governor Hisham Ramez.
As Kronfol notes, support from Gulf states has bolstered Egypt’s reserves. Greater political stability (although fissures remain) has also helped bring a rebound in GDP since the inauguration of the former military leader Abdel Fattah El Sisi as president in June 2014. In the second half of 2014, output increased more than 5% over the same period in 2013, according to government figures cited by Fitch.
Core drivers of the economy and dollar inflows — tourism, construction and Suez Canal traffic — are returning to normal, Kronfol says. The central bank’s reserves, though still low, had risen to $19bn by May, from $16.2bn a year earlier.
Ramez’s moves from early 2015 to shift from Egypt’s costly policy of defending the peg to the dollar to shore up prices for imports are particularly deserving of praise. Allowing the pound to float is crucial for foreign currency flows and is boosting export competitiveness and investment, notes the IMF.
Ramez let the pound fall from 7.15 to the dollar to 7.6 in the second half of January, with the IMF welcoming the move in its Article IV assessment in February. The central bank devalued again to 7.8 early this summer. Farouk Soussa, chief regional economist at Citi, says that while Ramez’s foreign exchange policy could be more consistent and at times better communicated, this was “moving in the right direction” nevertheless.
“After some initial controls, which in the circumstances were reasonable, he [Ramez] has allowed the currency to ease, to create a more open market and weaken the black market in dollars,” says George Abed, director for the Middle East and Africa at the Institute of International Finance. Abed also praises the central bank’s moves towards greater transparency, as he sees it, with fuller and more frequent communications to the market.
Abed notes that Ramez has helped the government’s steps towards fiscal consolidation, most importantly so far in the phasing out of consumer subsidies, which remain among the most egregious problems in the economy in many economists’ opinions. The government has also taken steps towards introducing VAT.
Egypt began to reduce subsidies on goods such as water, electricity, fuel and other items from mid-2014 and has continued this year. “It’s the perfect time to cut subsidiaries as the fall in the commodities prices means the end cost to the consumer will remain flat or fall,” says Ed Parker, senior ratings analyst at Fitch.
Parker notes Fitch upgraded Egypt from B- to B in late 2014, citing efforts to tackle structural problems. Moody’s then upgraded the country from Caa1 to B3 in April this year, highlighting an improving economy and external position and greater orientation towards reform.
Monica Malik, chief economist at Abu Dhabi Commercial Bank, says Ramez has helped ease the impact of the subsidy removals, countering short term inflationary effects with what she terms proactive rate rises. “While the fiscal consolidation will improve the fiscal sustainability over the medium term, a relative price increase is inevitable,” the central bank noted in a statement in July last year when it implemented a 100bp hike.
Perhaps the clearest sign of Egypt’s increasing political stability and its rehabilitation on the global financial stage was its return to the Eurobond market via a $1.5bn 10 year deal with a 5.875% coupon in June, led by BNP Paribas, Citi, JP Morgan, Morgan Stanley and Natixis. The bond was “a sign of confidence — in part in the central bank”, notes Abed.
BACK IN THE FOLD
Speaking to Emerging Markets in mid-September, Hisham Ramez, Egypt’s central bank governor, has little difficulty in thinking of arguments to suggest his country’s economic prospects are looking up following the turmoil of the Arab Spring. After the opening of an expansion of the Suez Canal in early August, he notes Egypt’s summer was rounded off with the announcement of a large gas discovery. “We have had a lot of challenges over the past four years but during the past year we’ve seen a lot of improvement,” says Ramez. He also points to the tough work the country has done in decreasing subsidies to alleviate structural pressures on the budget.
Ramez says one factor in Egypt’s favour has been a liquid and well capitalised banking sector and he notes the decline
of inflation towards single digits, which he calls “a great achievement”. Meanwhile, he says foreign exchange continues to move out of the black market and back to the banking sector. This year’s devaluation was “the biggest move done for a very long time” but he says the aim is for an “orderly market”.
Ramez says higher US rates and greater risk aversion to emerging markets will accentuate the importance of structural reforms, but he is confident that good opportunities will shine through. “There is still a lot of money in this region and it needs to be invested in real businesses,” he says. He says the new gas discovery is just one element of Egypt’s diverse potential, and although production may be years away, he says “the smart money comes first”.