Egypt: Devaluation still likely - BBH

According to analysts from Brown Brother Harriman, the 3-year IMF deal will help Egypt but a devaluation is still likely.

Key Quotes:

“The IMF and Egypt have reached a staff-level agreement on 3-year loan program.  Egypt still faces significant challenges ahead, but the IMF program should give them some breathing room.  Implementation is key, and we think the pound will be devalued again.”

“An optimistic take is that the IMF program will put the Egyptian economy back on a sustainable recovery path. A pessimistic take would be that entrenched interests and endemic corruption will prevent successful implementation of the IMF program.  We think the truth lies somewhere in between.”

“The economy is slowing. GDP growth is forecast to decelerate modestly to around 3% in 2016 before picking up to around 4% in 2017. GDP rose 2.2% y/y in Q4, and suggests downside risks to the growth forecasts.  Likely austerity measures to be required by the IMF would also add to the headwinds.”

“EGP has basically been pegged near 8.88 since the March devaluation, but we don’t think this can be maintained much longer.  Egypt and the IMF have agreed in principle to a 3-year IMF program worth $12 bln, with details to be hammered out. We believe the peg will be dropped, as the IMF will not want its funds wasted defending an unsustainable peg. Another stepwise devaluation seems likely soon, perhaps on the scale of the 15% move back in March.”