Egypt has limited war chest to avert finance crisis

Egypt has limited war chest to avert finance crisis

Money outflows, blow to tourism will drain reserves; Several weeks of unrest would have significant impact; Weaker pound would boost inflation which fuelled riots; Concern about stability when banks reopen.

January 31, 2011 12:44 by Reuters

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 Jan. 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.”

REVERSAL OF FLOWS

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.

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