Thursday, December 20, 2012

Egyptian Pound to Sharply Drop, Inflation to Hike in 2013

Egyptian pound to sharply drop, inflation to hike in 2013: Economist

Marwa Hussein, Wednesday 19 Dec 2012
Ahram Online

As the IMF $4.8 billion loan falls through amid Egypt's worsening political crisis, head of research at EFG-Hermes investment bank warns of rising inflation and sudden devaluation until finance deal signed

The Egyptian Pound (LE) is under severe pressure and will continue to drop in value after the postponement of the International Monetary Fund (IMF) $4.8 billion loan, a new report by investment bank EFG-Hermes says.

The deal was indefinitely postponed due to the ongoing political crisis and unrest in the country over the new draft constitution. The second round of the constitutional referendum is set to take place on Saturday.

In the past two weeks, the Egyptian pound lost some 1.5 per cent of its value versus the dollar, reaching LE6.15 to the dollar.

EFG-Hermes, the largest investment bank in Egypt and the Middle East, published a report Tuesday forecasting a larger depreciation to the pound by the end of 2013, to reach 6.6 instead of 6.4.

"We expect downward pressures on the Egyptian pound to continue in the first quarter of 2013 until an IMF deal is announced," reads the report.

"The announcement may ease these pressures but we continue to expect the Central Bank of Egypt (CBE) to allow for a gradual weakening of the pound on rising inflation and a weak fundamental balance of payments."

A severe devaluation will, automatically, lead to higher inflation rates as Egypt is a net food importer. "Inflation will rise next year no escape," Wael Ziyada, head of research at EFG-Hermes, told Ahram Online.

Hermes expects that a weaker pound in 2013 along with the government’s plan of fiscal consolidation through cutting subsidies would lead to acceleration of inflation rate.

The investment bank expects year-on-year inflation to accelerate from 5.7 per cent in the first half of 2013to 8.5 per cent in the second half of the year.

A weaker pound will also increase the budget deficit expected at 10.9 per cent of GDP, pushing it to LE168 billion in 2012/2013.

EFG-Hermes forecasts it might rise to 11.7 per cent of GDP to LE202 billion.

The approval by the government to add an additional LE50 billion to the budget normally raises worries about a deficit increase.

Ziyada says he expects the IMF loan to be finalised in the second quarter of the coming year (April-June).

"If the IMF deal is not signed by that date and political turbulence continues, the pound might face a disorderly [sudden] devaluation but so far we believe a gradual devaluation is more probable," he told Ahram Online.

However, EFG Hermes does not believe that a disorderly devaluation is the certain outcome if the IMF loan falls through.

"It is hard to tell now, we need to see first which are the sectors that face problems at that time," Ziyada adds.

The IMF loan and other bilateral loans expected to be disclosed after the finalisation of the IMF agreement will not be enough to guaranty medium and long term stability for the pound.

"A sustainable policy capable of reducing the budget deficit, increasing production and foreign currencies flow is definitely needed," concluded Ziyada.

Striking workers claim victory at Egypt's cigarette monopoly

Bassem Abo Alabass
Wednesday 19 Dec 2012
Ahram Online

Two-day strike for better pay and conditions at state-owned Eastern Company cigarette manufacturer ends after investment minister promises to meet workers' financial demands

Around 23,000 workers at Egypt’s cigarette monopoly, Eastern Company, have ended their two-day strike after the investments minister promised to meet their financial demands, a source familiar with the matter told Ahram Online on Wednesday.

For two days, striking workers had been hampering traffic on Al-Haram Street in Giza to demand the dismissal of the company chairman, Nabil Abdel Aziz, and to call for better pay and conditions.

They demanded that at least 6,000 temporary workers be put on permanent contracts and for a rise in bonuses from 15 to 30 per cent to reach LE150 per month ($24.30).

“They will now receive a meal allowance of LE400 per month,” the source added, confirming that manufacturing and production lines had resumed work.

The workers agreed to drop their demand that the chairman step down.

Eastern Company posted a net profit of LE631 million (US$105.9 million) last year, down 26 per cent from a year earlier, the stock exchange said in July 2011.

The cigarette monopoly made a net profit of LE850.4 million in fiscal year 2009/2010, according to a statement sent to the bourse.

Three companies are currently licensed to make and sell cigarettes in Egypt, led by the state-owned Eastern Company, whose cheaper Cleopatra brand has long dominated the market. Two foreign companies also operate in the local market, BAT-Egypt and Phillip Morris International, both of which use Eastern Company factories to manufacture their products.

Last week, Egyptian President Mohamed Morsi announced he would raise taxes on consumer goods, including cigarettes. Taxes on locally produced cigarettes were due to go up by LE2 per pack and by LE2.50 on imported brands. Morsi later reversed the decision and called for dialogue.

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