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FALLING POUND: Egyptian pound drops on devaluation talk
"The fact is that the central bank has only so much in terms of resources available in order to combat the economic situation, where Egypt has a long-term current account deficit (which it also needs to finance)," said an Egypt-based analyst.
December 27, 2012 5:37 by Reuters
The Egyptian pound hit a near eight-year low on Wednesday as concerns the government might devalue or bring in capital controls drove many to shift their assets into dollars, traders said.
Renewed political strife over the past month has cast doubt on the government’s ability to push through spending cuts and tax hikes, seen as a prerequisite for a $4.8 billion International Monetary Fund loan that Egypt needs in order to tackle a financial crisis.
Credit agency Standard & Poor’s cut the country’s long-term rating on Monday and said another downgrade was possible if politics undermined efforts to prop up the economy and public finances.
Reflecting those concerns a day after the government made it illegal for travellers to carry more than $10,000 out of the country, President Mohamed Mursi on Wednesday signed into law a new constitution shaped by his Islamist allies.
He says the bitterly contested document which he says will help end the turmoil and fix the economy.
Market players said the political turmoil along with dwindling foreign exchange reserves had narrowed the country’s options for dealing with a spreading currency crisis.
“The fact is that the central bank has only so much in terms of resources available in order to combat the economic situation, where Egypt has a long-term current account deficit (which it also needs to finance),” said an Egypt-based analyst.
The pound was bid as low as 6.1775 to the dollar on Wednesday compared to 6.169 on Tuesday. This was its weakest in almost eight years and took it closer to the all-time low of 6.26 it hit on Oct. 14, 2004.
“All customers are rushing to buy dollars after the (S&P)downgrade,” said a dealer at a Cairo-based bank. “We’ll have to wait to see how the market will operate with the U.S. dollar, because as you know there is a rush at the moment.”
The planning minister said in remarks published on Wednesday the government would not implement planned tax increases for two weeks until it completed talks with different sections of society to persuade them of the need for austerity measures.
To allow it to seek more popular support for the loan, the government has also asked the IMF to delay by a month a meeting it had scheduled to approve the funds.
The government’s near-term options for the pound include allowing it to devalue, putting controls on capital flows to protect it, or seeking loans from abroad to top up central bank reserves – or a combination of the three.
Dealers said there were signs the central bank was selling dollars on Wednesday to keep the currency from weakening further. Trading was exceptionally heavy, boosted by orders left over from Tuesday, which was a bank holiday in Europe.
The bank has spent more than $20 billion of its foreign reserves to support the pound since the popular uprising that toppled Hosni Mubarak in early 2011.
Reserves fell by $448 million in November and stand at $15 billion, equal to only about three months of imports.
Bankers say the recent political turmoil is certain to be reflected in December’s reserves figures, which are due to be released in the first week of January.
“Definitely there is pressure on the pound,” said a dealer at a second bank. “If foreign reserves are much lower at the end of the month the central bank will have to lower the pound.”
The central bank has already limited Egyptians from transferring more than a cumulative $100,000 out of the country since the popular uprising nearly two years ago, unless they can demonstrate a pressing need for the funds.
But any further tightening of capital controls following Tuesday’s action against those leaving the country risked inflicting damage on economic activity, analysts said.
In recent months Qatar has lent Egypt $1.5 billion for budget support and promised another $500 million for December. Turkey has also lent $500 million and promised another $500 million.
During a currency crisis triggered by a massacre of tourists in 1997, the government restricted currency sales, limited imports and shrank the money supply before allowing the pound to become fully convertible in late 2004. Over those seven years, the pound fell to 6.26 to the dollar from 3.42.
Analysts say the central bank has become far more sophisticated in the last decade and has more monetary tools at its disposal.