Tags: Egypt | dollars | Banks | Pound

Egypt Offers Dollars to Banks as Pound Weakens to Record

Monday, 31 Dec 2012 07:07 AM

 

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Egypt’s central bank will offer banks $75 million in the second of daily foreign-exchange sales designed to conserve currency reserves as the pound weakened to a record low.

The regulator said each bank will be eligible to bid for a maximum of $11 million in Monday’s auction. The offering follows a delay in securing a $4.8 billion International Monetary Fund loan seen as crucial to encourage foreign investment after reserves plunged almost 60 percent since last year’s uprising. The pound was little changed at 6.3050 a dollar as of 10:14 a.m. in Cairo after weakening 1.9 percent Sunday, according to data compiled by Bloomberg. The currency had depreciated 2.6 percent in the year to Dec. 27.

The weakening is a “mini-devaluation,” Mohamed Abu Basha, an economist at Cairo-based investment bank EFG-Hermes Holding SAE, said in a report. The central bank’s main target is “to instate a transparent mechanism to value the pound through the market with an aim to limit speculation.”

While President Mohamed Mursi and his premier dismissed talk of the nation being on the brink of bankruptcy, government efforts, including a public appeal to limit the use of dollars, fed into broader worries. Some exchange houses in Cairo turned customers away before the central bank’s auction, while others said they didn’t have enough dollars to meet demand. Authorities have also imposed restrictions on the amount of dollars travelers can carry in and out of Egypt.

Real Price

“What we’re seeing now is the real price of the pound,” Wael Samir, manager of Al-Tawheed Exchange in Cairo, said in an interview. “There has been huge demand and not enough supply over the past few days. People were expecting a devaluation and were trying to buy dollars to hold.”

The central bank yesterday sold $74.9 million to banks at a cut-off price of 6.2425 a dollar, a 0.9 percent depreciation from the Dec. 28 closing price, according to data compiled by Bloomberg. The benchmark EGX 30 Index gained 0.5 percent at the close yesterday and was little changed Monday.

The auction came as Prime Minister Hisham Qandil said the country would invite the IMF next month to Cairo, with an eye to resuming talks on the loan.

Public Support

Echoing Mursi, who had called on the opposition to work in tandem with the government to restore stability, Qandil said the government would start a national initiative to boost the economy. The new push will focus on building broad public support for the economic program presented to the IMF. The hope is there will be “no fundamental changes” to the program which had won backing from the fund, he told reporters.

Standard & Poor’s, citing political unrest, lowered Egypt’s credit rating to the same junk level as Greece and Pakistan on Dec. 24, raising the government’s borrowing costs.

The government canceled the sale of 6 billion pounds ($970 million) in six-month and one-year treasury bills Dec. 27. It raised 1 billion pounds selling nine-month notes Monday, missing a 3 billion-pound target, central bank data on Bloomberg show.

Qandil downplayed concern that Egypt would declare bankruptcy, and said the nation’s rocky transition has left policy makers with no choice other than to rely on funding from abroad to help bridge the deficit.

Aid Stalled

Aid and loan pledges from the World Bank, the European Union and the African Development Bank have been “stalled” pending a final agreement with the IMF, Planning and Cooperation Minister Ashraf el-Arabi said in an interview in Cairo.

In announcing the auction, the central bank called on Egyptians to “ration” their foreign currency use. It said the auction would “complement and support” the dollar interbank market, which was introduced by Governor Farouk El-Okdah after a devaluation in 2003 when the country dropped the peg to the dollar. The interbank market was aimed at easing access to foreign exchange and helped to put an end to the so-called black market for currencies.

The pound, subject to a managed float, had weakened 1.2 percent this month before the auction, according to data compiled by Bloomberg.

“The likely signing of the IMF deal in a few weeks could act as a potential source for stabilizing the pound in 2013, Abu Basha of EFG-Hermes wrote. “Foreign bond investors may be more encouraged to invest in the local debt market given that the pound risk, which constituted a main barrier for their entry, may be diminishing after the depreciation over the past few weeks.”

Black Market

Managers at several currency exchanges said they weren’t aware of the results of the auction and were unclear on what had precipitated the decline, reflecting the broader unease in the country even as officials have pledged greater transparency.

“People are abandoning the pound for currencies like the pound sterling, the euro or the dollar,” said Samir. “If things continue like this, there will definitely be a black market emerging” like that in 2003, he said.

The worry is also that the weakening of the pound against the dollar will “create a wave of inflation,” said Mohamed Kotb, regional asset management director at Cairo-based Naeem Financial.

“I don’t blame the central bank for this, I blame the government for bringing us to this stage,” he said by phone. “We didn’t conclude the IMF agreement and the consequences are bad.”

© Copyright 2014 Bloomberg News. All rights reserved.

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