| Kippreport.com

Egypt has limited war chest to avert finance crisis

January 31, 2011 12:44 by Reuters

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.

CURRENCY

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 percent of its value, to 5.855 against the U.S. 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 towards 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.

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