Shares of the embattled Market Vectors Egypt ETF (NYSE:EGPT) are off 1.4 percent today on news the North African nation is at risk of losing a $4.8 billion loan from the International Monetary Fund due to civil strife there.
Already suffering from a weak currency and plunging foreign currency reserves, Egypt's foreign reserves situation is worse than previously thought, imperiling the country's ability to secure the much needed IMF aid.
Egypt's central bank has revealed that its foreign reserves slid to $13.61 billion in January from just over $15 billion in December. Egypt had $36 billion in foreign reserves when the Arab Spring first touched off two years ago, according to the Associated Press.
Egypt's plummeting foreign reserves have chased Egyptians out of their local currency, the pound, into U.S. dollars. That run was so dramatic that the central bank had to ration dollars, but there merely sent Egyptians scurrying for euros. While it may not be accurate to yet say Egypt has experience an outright run on its banks, the situation could be problematic for EGPT because the ETF does allocate nearly 41 percent of its weight to financial services stocks.
As part of the $4.8 billion loan deal, the IMF wants Egypt to implement harsh Eurozone-esque austerity measures such as tax hikes and subsidy reductions.
Due to civil unrest there, observers doubt President Mohammed Morsi has the political capital to implement those measures. With an unemployment rate of about 12 percent, which is double for the nation's youth, the IMF loan is critical, but the IMF austerity program would no doubt be viewed as harsh.
EGPT has previously shown some sensitivity to foreign aid news. In September, the ETF surged on news Egypt was close to getting the U.S. to forgive $1 billion in debt.
Missing out on the IMF loan could have consequences for Egypt and EGPT. Without that loan, Egypt may not be able to finalize talks for a $900 million loan from the European Union, $500 million from the African Development Bank and $450 million from the United States, according to the AP. Egypt is also in discussions with Turkey for $1 billion in financing.
Including today's loss, EGPT is now off 4.4 percent year-to-date compared to a three percent for the Vanguard FTSE Emerging Markets ETF (NYSE:VWO).
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