Saudi Arabia Says Days of Unconditional Foreign Aid Are Now Ove
Comment of the Day

January 18 2023

Commentary by Eoin Treacy

Saudi Arabia Says Days of Unconditional Foreign Aid Are Now Ove

This article from Bloomberg confirms what I was hearing at the Future Minerals Forum last week. Here is a section: 

As part of its deal with the IMF, Egypt agreed to shrink the footprint of all state-run enterprises, including “military-owned companies,” and committed to allow for a more flexible exchange rate.

“We are also looking at our region, and we want to be a role model for the region,” Al-Jadaan said. “We are encouraging a lot of the countries around us to really do reforms,” he said.


Eoin Treacy's view

The UAE’s reluctance to offer donations but attach support to investments is a model Saudi Arabia is now also following. The big oil exporters want regional stability. This change of policy suggests they now appear to believe that will best be achieved through economic reforms.

The Arab Spring shook up the Middle East more than a decade ago and resulted in significant turmoil. It now appears that the policy suite developed in response to those events has matured. Large young populations need to be offered a route to a productive life or rebellion is inevitable.

Wealthy countries like Saudi Arabia and the UAE have a vested interest in ensuring social and economic stability. Political stability is a nice thing to have but the other two factors are more important when a country like Egypt has a population of 105 million and is going through some major debt issues.

Deposit rates are 16.25% and the yoy inflation is running over 20%. That suggests continued scope for monetary tightening unless inflation comes back down in the hurry. The Pound appears to have been repegged after about 24 hours of free floating action last week.

Here is how a friend, Cherif Barakat, CEO of Eastern Desert Gold describes the situation on the ground:

“Will take a few months. What I find interesting about Egypt's moronic central bankers is that they have been essentially subsidizing the foreign investor by limiting the downside pressure on the pound when they all sell these notes and repatriate, by not letting the pound genuinely float.

The black market is effectively gone at present (sucks for me), so in that respect the devaluation is successful. I think foreign investors have poured in $925m in FX inflows since 11 Jan. Local certificates are 25% for 12 months paid monthly. The state banks announced today that they will stop issuing these by the end of the month”
All of this on the ground intelligence suggests the status quo remains intact despite threats of assistance carrying conditions. Interestingly Egypt’s US Dollar 6.2 March 2024 bond surged to a yield of over 15% in July but has since contracted to around 8.73%. That suggests less risk of imminent disorder than headlines suggest.

The VanEck Egypt ETF continues to pause in the region of the 200-day MA but a clear upward dynamic will be required to confirm support in this area. 

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