MIDEAST WEEKAHEAD - Egypt shares, yields to depend on IMF talks
* IMF talks expected after Eid holidays
* Stocks may move sideways until talks show progress
* Bank acquisition talks also key to sentiment
* An IMF deal could permit interest rate cut
* Money market liquidity improves, less dollarisation
By Edmund Blair
CAIRO, Oct 24 (Reuters) - The mood of Egypt's financial markets is likely to depend heavily next week on the government's progress in securing a $4.8 billion loan from the International Monetary Fund.
An IMF team is expected to come to Cairo for talks after the Eid al-Adha holidays, which run from this Thursday through Sunday, according to Egyptian and IMF officials.
IMF Managing Director Christine Lagarde was quoted by Egypt's MENA news agency in Washington as saying she was "optimistic that the loan negotiations would be completed by mid-November".
A loan deal would for the time being lay to rest lingering concern in the markets that Egypt might run out of foreign reserves to support the value of its currency. Reserves have dropped by more than half since the start of last year.
But well before any loan agreement is reached, markets will be sensitive to any indications from the talks of whether the IMF is satisfied with Egypt's plans for economic reform.
Its benchmark stock index has surged and yields on government debt have fallen since President Mohamed Mursi took office in June, starting a period of relative political stability after months of turmoil since last year's uprising against Hosni Mubarak.
But state finances are still fragile because the government has not delivered on promises of reform, including action to rein in hefty fuel subsidy payments, which is seen as essential to securing the release of IMF cash.
"The thing about the IMF loan is market confidence," said Omar Ascar, head of trading at Cairo Capital Securities, adding that he expected stocks to drift sideways until there were developments with both the IMF and the efforts of foreign institutions to acquire stakes in Egyptian banks.
There are signs that Egypt is again drawing interest from foreign investors, but two big deals in the works have yet to be completed.
Qatar National Bank has expressed interest in buying majority French-owned National Societe Generale Bank (NSGB) , while QInvest, another Qatari firm, has Egyptian regulatory approval to tie up with EFG-Hermes.
Egypt's stock index has moved sideways for the past month. But Mohamed Radwan at Pharos Securities said there was a good chance for its uptrend to resume after the holidays.
"After Eid, with the IMF delegation on the ground and the likely closure of the QNB-NSGB deal, we expect some decent gains," he said.
The index nudged above the 6,000-point mark during two trading sessions in September, the first time it reached that level since the uprising against Mubarak began in January 2011.
So far it has not closed above that mark. But it is still more than 50 percent higher than it was at the start of 2012, putting it among the world's best-performing equity markets.
Also reflecting greater confidence in Egypt, yields on Egyptian Treasury bills have been sliding. Since Mursi's election, the yield on 91-day bills has dropped more than 2 percentage points to under 12.5 percent.
Youssef Kamel, a fixed income analyst at financial firm Rasmala, said yields would probably stabilise or might even nudge higher until the IMF deal was secured or Egypt obtained other external support.
The country has secured some aid from Gulf and Western states, and if it can start to replenish its foreign reserves, the central bank may feel it has room to cut interest rates to spur economic growth. Last week the central bank decided at a meeting to keep rates steady, apparently because it did not want to risk undermining the Egyptian pound.
Kamel noted that liquidity in the local money market had improved, with some funds shifting from dollar accounts into the local currency.
"The amount of cash parked at the Central Bank of Egypt overnight has risen significantly over the past two weeks or so," he said, adding that it had been climbing since June.
"The accompanying drop in dollarisation also hints at increasing confidence in the Egyptian pound."
The amount of money which commercial banks are seeking from the central bank at its money market operations also seems to have dropped, suggesting banks have more liquidity at their disposal.
"Despite the introduction of the 28-day repo facility on July 10, the total amount of repos demanded by banks fell significantly during the quarter (to Sept. 30), after having increased to record highs in June," Kamel said.
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