Egypt’s pound depends on political progress

Egypt's new government has little time to get a credible political process in place before it risks renewed and possibly unsustainable pressure on its currency.

The revolution that ousted President Hosni Mubarak shattered two of the main pillars supporting the Egyptian pound, tourism and foreign investment, and put pressure on others, such as remittances from Egyptians working abroad.

These sources of economic growth will not revive unless Egyptians and foreigners are convinced life is heading back to normal. If they aren't, Egypt risks quickly depleting its US$35 billion in foreign reserves.

"Short term I'm bearish. Foreign exchange inflows are now gone," said Raza Agha, a Royal Bank of Scotland economist.

"Over the medium and long term, resolution of the political situation is key, because only that will ensure that the tourists and the FDI (foreign direct investment) returns and exports are not impacted by any strikes or public unrest."

Egypt's military rulers have promised constitutional changes leading to free and fair elections within six months. A judicial committee tasked with drafting the changes proposed amendments on Saturday that will be voted on in a public referendum.

Such a referendum may be just weeks away, giving the government scant time to build up its confidence, and investors will be watching to see if the constitutional process is enough to satisfy pro-democracy protesters still active on the streets.

On Saturday, soldiers used force to break up a protest demanding more political reform in Egypt in the toughest move yet against opposition activists who accused the country's military rulers of "betraying the people".

The most immediate test of the currency and an important symbol that politics and the economy are returning to normal will be the opening of Egypt's stock market after a month-long closure.

Investors are bracing for a possible plunge in share prices and a further outflow of funds from the pound, if sellers of stocks seek to exchange the proceeds for foreign currency.

"The key is to watch what happens in the aftermath of the stock market opening," Khan said. "You may see some depreciation pressure on the pound as foreigners try to liquidate their positions."

Bankers say that until now the central bank has deftly handled the foreign currency crisis, holding the pound's losses to 1.2 percent of its value since protests erupted on 25 January. The pound is currently trading at 5.89 pounds per dollar

Still, there are signs the country's finances and currency are feeling the pinch and that at least some banks are running short of dollars.

Even though banks were open for only two days in January after anti-government protests started, Egypt's foreign reserves fell by about US$1 billion in January, their first decline in over a year and the biggest since April 2009 in the wake of the global economic crisis. Banks have reopened since then.

In the last two weeks, the central bank has quietly sought to slow transfers out of pounds with a series of unwritten instructions to banks that stop short of out-and-out capital controls, bankers inside and outside of Egypt said.

The central bank has placed inspectors inside the dealing rooms of at least some of the country's banks, where they are investigating where people seeking to transfer funds got their money and where they're sending it, bankers said.

Clients asking to transfer more than US$100,000 must wait five days until settlement instead of the normal two. Banks are also required to double-check transfers as small as US$10,000.

The stated reason for this is to make sure the funds were not obtained illegally, but at the same time it is helping the government to slow the outflow of funds, bankers said.

Banks have sought to discourage clients who want to shift their funds into dollars or have out-and-out refused, several people who have tried to buy dollars said.

This has been confirmed by bankers: "We are telling our clients there is a shortage of dollars and we can't do it," one banker said.

Foreign currency transactions on Egypt's interbank market have averaged about US$300 million a day over the last week, an amount bankers say is surprisingly small considering the size of the economy and the political turbulence of the last month.

Asked by local journalists about the cost of the unrest, newly-appointed Finance Minister Samir Radwan quoted a 4 February note by Credit Agricole estimating it at US$310 million a day — a reminder of Egypt's urgent need to revive traditional sources of national income after weeks of political turmoil.

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