Reuters, Cairo: Egypt has substantial reserves to avoid an external
payments crisis but these could be seriously depleted within weeks if
political protests continue, while its banks may struggle to cope with
a rush of withdrawals.
In the two working days after the protests erupted last Tuesday, which
was a bank holiday, Egyptians and foreign investors transferred
hundreds of millions of dollars out of Egypt, currency traders
estimated.
The government had $36 billion in foreign reserves at end-December,
central bank figures showed. According to a January 27 note by
Citigroup, it also had $21 billion of additional assets with
commercial banks at end-October — its so-called 'unofficial reserves.'
These numbers suggest there is no immediate danger of a balance of
payments crisis. But scenes of chaos at Cairo's main airport on
Sunday, as both foreigners and Egyptians tried to get flights out of
the country, indicated outflows of money could reach damaging levels
over the medium term.
Egypt has a financial war chest, 'but the war chest is going to be
depleted if this situation continues for several weeks rather than a
few days,' said John Sfakianakis, chief economist at Banque Saudi
Fransi.
'When markets begin to make bets against (the Egyptian pound), it will
have a severe impact. The whole fiscal position of the Egyptian
economy is going to be put to a very hard test if the violence,
rioting continues for several weeks.'
Egypt is vulnerable to a reversal of large flows of foreign portfolio
investment that have been attracted by high yields on domestic
government debt. Barclays Capital estimated foreign holdings of
Egyptian assets before the protests were close to $25 billion, with
roughly half held in Treasury bills and bonds.
Foreign direct investment is based on long-term planning and is less
likely to be influenced by the political unrest. Egypt drew $6.76
billion of such investment in the last fiscal year to June 30, of
which $3.6 billion went to the petroleum sector.
But the damage from any extended disruption to tourism could be
considerable; Egypt earned $11.59 billion from tourism last fiscal
year. It ran a current account deficit of $802 million in the
July-September quarter of 2010, and because of tourism the deficit is
likely to be much higher in the current quarter.
Equally worrying is the risk that middle-class and wealthy Egyptians
will send more of their savings abroad. These outflows might match or
over the long term, even exceed money pulled out by foreign portfolio
investors.
Official figures are not available but a dealer at a medium-sized bank
based in Cairo, who declined to be named, said clients at his
medium-sized bank alone had transferred $150 million out of the
country in two days. Some bankers said total outflows of funds from
Egypt might have been at least $500 million per day last week.
If outflows continued at that speed without accelerating, Egypt could
lose over a quarter of its official reserves within a month.
Central Bank deputy governor Hisham Ramez told Reuters on Saturday:
'We are ready. Our reserves are very strong. We have no problem.' He
did not elaborate on how authorities would cope with pressure on the
pound.
Much will depend on how authorities try to manage the Egyptian pound
when financial markets eventually resume trading. The government
closed the markets and commercial banks on Sunday, citing security
concerns, and has said they will stay shut on Monday; it has not
indicated when they will reopen.
Last week the pound shed only 0.7 per cent of its value, to 5.855
against the US dollar. The central bank said it did not intervene
directly or indirectly in the market; the Cairo dealer said banks
remained willing to sell dollars in the expectation that the central
bank would provide dollars at a stable rate if needed.
When the markets reopen, however, traders may test the central bank's
willingness to keep the exchange rate stable. If it spends what is
necessary to keep the pound stable, it may start running through its
reserves at an alarming rate. If it lets the pound fall toward a rate
at which buying dollars would be less attractive, it may simply fuel
panic in the market.
A substantially cheaper pound would also increase the prices which
Egyptians pay for foreign goods, contributing to the high inflation
which helped spark the anti-government protests.
Some analysts think authorities may therefore consider imposing
controls to limit transfers of funds overseas. But this might damage
Egypt's reputation in the markets further, while simply driving
Egyptians to seek underground channels.
'There is always a reluctance to go down the route of imposing capital
controls,' said Ann Wyman, analyst at Nomura.
'If you do that to stop capital exiting, the long-term implications
are negative. Egypt does rely on foreign inflows so it's important to
keep long-term prospects in mind. Any decision like that will not be
taken lightly.'
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