Nafeh says he expects negative repercussions on the IPO programme and further negative repercussions — not on future credit ratings, but on the dollar exchange rate in the parallel market.
Nafeh said there was no clear information about the floating exchange rate.
He said: "Usually, a foreign investor doesn't invest in dollars unless they have clear information about the exchange rate to be adopted for asset valuation; whenever the pound falls against foreign currencies, it's in the interest of the foreign investor."
The economist pointed out that S&P and other rating agencies resort to negative outlooks when they expect the next credit rating review to point to more risks.
This requires an additional downgrade if there are no positive changes, he said, adding that the next rating is likely to be lower than the current rating due to continued uncertainty in the markets.
This is why the IMF delayed wiring its second loan instalment to the Egyptian government, Nafeh explained, adding that S&P based its downgrade on the government's failure to meet the IMF's conditions between January and March, which is a very short amount of time.
He expected the rating agency to change its view before July once the Egyptian government implements Madbouly's pledges. The government has previously announced its intention to sell government stakes in 32 companies between the first quarter of this year and the end of the first quarter of 2024.
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It was recently announced that the shares of two companies belonging to the armed forces — Watania and Safi — would be subjected to an IPO.
More than 10 other companies belonging to the armed forces are also being prepared for an IPO through the government's programme, which opens companies and banks with IPOs and direct share sales to strategic investors.
An international advisory entity, along with investment banks, will be appointed to assist the Egyptian government in completing the programme.
Egypt is awaiting the IMF's announcement of its quarterly review, which was supposed to be published in late March. The IMF seems to be waiting for more clarity on economic reform programme promised by Egypt as part of its recent agreement with the IMF.
The programme includes a comprehensive liberalisation of the pound's exchange rate and the sale of stakes in banks, companies and state-owned enterprises to strategic investors or subjecting them to IPOs to encourage further investment and enhance the private sector's role in the economy.
However, these reforms have a significant impact on the lives of the majority of Egyptians because of price hikes that reduce their purchasing power and consumption; this leads to lower sales and production and higher poverty rates.
Egyptians turn to gold
Some Egyptians are turning to gold bullions and gold pounds as a refuge to preserve value, and at the same time, a means to offset the sky-rocketing inflation rate. The dollar exchange rate in the parallel market varies between EGP 35 and EGP 39, while it has been stable on the official market at EGP 31 (spot) and EGP 42 (futures).
One of the largest US banks, Goldman Sachs International, said in a report on the dangers posed to the Egyptian pound by the parallel market, that the refusal to move to a flexible exchange rate for the pound against other foreign currencies will lead to further distortions.
It could also possibly lead to an unsustainable economy due to the continued existence of a parallel foreign exchange market where the pound is being traded at an informal rate.
One of the main risks addressed in the report is the diversion of foreign exchange flows away from the official market to the parallel market, including remittances from Egyptians working abroad, which account for about one third of current account inflows.
The remittances fell by 23% during the first six months of the current fiscal year (2022-2023) to record about $12bn.
The persistence of the informal currency market encourages practices that are harmful to the economy, such as excessive imports, low exports and declining foreign and domestic investment. This means that the potential advantage of maintaining a relatively strong currency is lost.