| Kippreport.com

Egypt has limited war chest to avert finance crisis

January 31, 2011 12:44 by Reuters

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.”

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.

BANKS

Egypt also faces a dilemma over reopening its banks. It will probably need to reopen them within days to avoid serious damage to the economy, and to continue funding itself.

The government was due to sell a total of 4 billion Egyptian pounds ($685 million) of short-term Treasury bills on Sunday but this sale did not go ahead in the absence of banks to buy them, traders said. It was not clear when the debt would be sold.

But when the banks eventually reopen, they may struggle to handle a flood of people scrambling to take out cash in case of another closure.

“People are running out of money, this is clear. We expect that when banks do reopen, there will be quite a run,” said one Cairo banker.

It is also unclear whether banks will continue do to business as usual with each other during the turmoil. The offshore rate for overnight Egyptian pound deposits between banks soared to about 19 percent last week from normal levels of around 6 percent in January.

This suggested some banks might be having difficulty attracting Egyptian pound deposits — an early sign that the interbank money market could freeze up if banks became nervous about lending out their funds.

(By Patrick Werr. Editing by Andrew Torchia)

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