(Corrects first paragraph to clarify Egypt has proposed cutting
subsidies; adds new second paragraph; removes IMF reference in
By Shadia Nasralla
LONDON Nov 8 Egypt's proposal to cut subsidies
as part of a loan deal with the IMF highlights a far broader
fiscal and social conundrum for the region, raising the stakes
Countries need support, but getting it can have side
Egyptian stocks have rallied 50 percent this year
on greater political stability and hopes for a deal with the
International Monetary Fund, after shedding half their value in
2011 after the ousting of Hosni Mubarak.
For many investors, securing a $4.8 billion IMF deal will be
the catalyst for a much-needed rebound in private-sector
"If the IMF gives Egypt a loan, that would supersede
everything else," said Sergei Strigo, head of emerging debt
management at French asset manager Amundi.
But taking cost-cutting steps to gain a deal could also pose
risks: A reform of Egypt's hefty subsidies, for example, c ould
hurt foreign investment in supported sectors such as energy as
well as prompt renewed social unrest.
"In a time of political transition and a fragile rebuilding
of the social fabric, a brutal cut in the subsidy system could
prove very sensitive," said Philippe Dauba-Pantanacce, economist
at Standard Chartered.
It's a dilemma that extends across the Middle East and North
Africa as lenders and ratings agencies demand that governments
cut budget deficits, at a time when authorities are reluctant to
reduce handouts for fear of aggravating the social turmoil that
has gripped the region.
Standard & Poor's downgraded Morocco's outlook in October to
'negative' and warned the country could lose its investment
grade rating if it does not significantly narrow its fiscal and
current account deficits.
Morocco's subsidy bill reached 6 percent of GDP in 2011. Its
fiscal deficit soared 462 percent in the first seven months of
this year as subsidies increased by 58 percent, according to
In Jordan, a $2 billion stand-by arrangement secured with
the IMF in August has provided a lifeline after foreign direct
investment slumped 31 percent in the first quarter of 2012 from
a year earlier and government subsidies rose 41 percent in the
first half of this year.
That has pushed public debt to above 72 percent of GDP,
according to Standard Chartered.
But worries about social tension have already prompted King
Abdullah in September to intervene and block a fuel price hike
recommended by the IMF, in order to quell street protests that
erupted on news of higher prices.
Jordan spends $2.3 billion on subsidies, almost a quarter of
its annual budget, and is trying to gradually force businesses
to pay higher fuel and electricity prices.
"Jordan is essentially on the brink of financial collapse
without IMF help," said Said Hirsh, economist at Capital
Eaton Vance's Parametric Structured Emerging Markets fund
has trimmed its 0.8 percent allocation in Jordan slightly, while
Templeton's frontier fund has reduced its Jordan weighting to
0.8 percent from 1.18, according to data from Lipper.
Across the Middle East and North Africa, dedicated MENA
funds tracked by Lipper, and with a little over $1.3 billion in
assets, have seen net outflows of just over $200 million this
year. Funds covering only Arab nations in the Gulf Cooperation
Council, with about $1.8 billion in assets, have seen net
outflows of just over $100 million.
Oil importers Egypt and Jordan in particular need to address
their balance of payments to attract loans and investment,
Egypt spent $15.7 billion, or 20 percent of government
spending, on subsidising petroleum products, including cooking
gas, in the financial year that ended on June 30.
Under the current system, a canister of butane cooking gas,
or "butagas", sells for around 5 Egyptian pounds, while it costs
almost 70 pounds to produce.
"There is still a lot to do for Egypt to avoid a big
financial crisis in the immediate term," Hirsh said.
"People are buying into Egypt's medium- to long-term story
rather than what's going to happen next year."
Egypt's finance minister said this week that the government
hoped to reach a deal with the IMF in the middle of next month,
but some investors are not so optimistic and it is unclear what
commitments Cairo will make to secure a financial backstop.
"It would appear that markets have taken an IMF deal as a
given ... It's probably a bit of an overreaction on the part of
investors," Hirsh said.
Templeton's Frontier Markets Fund has cut its Egypt
allocation to 4.6 percent of its portfolio from 6.2 percent at
the end of 2011, according to Lipper, while Morgan Stanley's
Emerging EMEA fund more than halved its holding to just over 2
percent, signalling caution.
Egypt's new leadership under President Mohamed Mursi seems
more willing to reduce its subsidies bill than Hosni Mubarak's
administration. But the government has been moving carefully to
sell austerity measures to a public whose economic expectations
have risen since last year's popular revolt.
Many investors have yet to be convinced that Cairo, and
other governments in the region, will be able to manage the
delicate balancing act of slashing subsidies and other needed
fiscal reforms, without arousing the ire of their restless
citizens. An IMF deal for Egypt would be only a first step.
"We don't think of the IMF as the gospel. For the time being
we're in wait and see mode." said Slim Feriani, Chief Executive
Officer of UK-based Advance Emerging Capital.
"Talk is cheap, the proof is in the pudding."
(Additional reporting by Joel Dimmock; Editing by Susan Fenton)