Egyptians seek dollars as devaluation concern grows

Egyptian businessman Sameh el-Meligy bought $85,000 worth of US dollars last week and has trimmed his holdings of Egyptian pounds to “basic expenses.”

Medhat Khalil, chairman of Raya Holding Co, says his information-technology company is basing its 2012 business plan on a forecast that the pound, which fell 3.6 per cent this year, may drop twice that much, and aims to boost revenue in foreign currencies. As they both seek US dollars, there are signs the government is trying to hold on to them: Its delay in paying a $200 million bill to fuel producer Dana Gas PJSC has sent the Sharjah-based company’s Islamic bonds to a 2/1-2 year low.

Such actions by Egyptians seeking protection from the risk of a devaluation may help make their concern self-fulfilling. Dollar deposits at banks jumped 12 per cent in the 10 months through October, and foreign-currency reserves have plunged 44 per cent this year, the biggest global decline outside debt- stricken Europe. The government is stalling on seeking International Monetary Fund loans that could help plug the gap.

“You’ve got a policy vacuum because there have been several finance ministers and no key decision are being made on the external assistance side,” Richard Fox, London-based head of Middle East and Africa Sovereigns at Fitch Ratings, said by phone. “While that continues, clearly the sentiment is going to deteriorate and you’re going to get more businessmen like this, voting with their feet.”

Fitch cut Egypt’s credit rating in February to BB, two levels below investment grade. Moody’s Investors Service has reduced its rating three times this year to B1, the fourth- highest non-investment grade.

Future contracts show investors don’t expect the defense of the pound to last, with 12-month non-deliverable forwards at 7.10 per dollar implying a 15 per cent slide in the coming year.

There’s a risk that the expectation of a decline will create the reality as “it will make people switch into dollars and this will accelerate the pound’s fall,” Samer Soliman, assistant professor of political economy at the American University in Cairo, said by phone on December 11.

Egypt scrapped plans for a $3 billion loan from the International Monetary Fund in June after the ruling military council, which took power from deposed President Hosni Mubarak in February, vetoed the agreement. Finance Minister Momtaz El- Saeed, sworn in last week as the third holder of the post since Mubarak’s fall, said Dec.ember 3 it was too early to tell whether the new army-appointed government will seek IMF assistance.

“In the absence of further financial support, the Central Bank of Egypt will find it increasingly difficult to maintain adequate international liquidity,” Moody’s sovereign analyst Mathias Angonin said in an e-mail, two days after Central Bank Governor Farouk El-Okdah said reserves were still “in a safe range.”

Egypt devalued the pound in 2003 after a drop in reserves prompted authorities to impose restrictions on foreign-currency withdrawals. The crisis led to the emergence of black-market exchange rates, forcing police to shut down exchange bureaus and arrest their owners for hoarding dollars. The central bank lifted most restrictions on foreign exchange in 2004 when it introduced an inter-bank market.

Central bank support has helped the pound outperform currencies in emerging markets that haven’t experienced comparable political turmoil. Brazil’s real is down 9.6 per cent this year, India’s rupee 15 per cent and Turkey’s lira 17 per cent.

The bank said December 6 it continues to “safeguard an orderly foreign exchange market,” after raising benchmark interest rates by a per centage point last month even as the economy struggles to recover after the uprising. The two biggest state- owned banks have increased deposit rates on three-year pound holdings by 2 per centage points to 11.5 per cent.

Those actions “may stem somehow” the pressure on pound- denominated deposits, Mona Mansour, co-head of research at Cairo-based investment bank CI Capital said.

Fadi Jundi, who owns an information technology company in Cairo, said he deposited some money in pounds after the rate increase. He’s now considering switching some of it into dollars, even though he’ll be charged for early withdrawal from a time deposit.

“The consequences of further political instability will be a currency crisis,” Jundi, 36 said. “The cost of this will be much higher” than the bank’s penalty.

Egypt’s army, which says it will hand power to an elected president next year, is facing renewed demands from protesters and political parties for a faster transition. The Muslim Brotherhood, whose Freedom and Justice Party won most votes and seats in the first round of parliamentary elections, refused last week to join a consultative body set up by the generals.

The turmoil has sent borrowing costs at treasury-bill auctions to a record. The yield on Egypt’s 5.75 per cent dollar bond due April 2020 has surged 187 basis points this year to trade at 7.06 per cent as of 5 pm on Sunday. The benchmark EGX 30 stock index is down 46 per cent.

Dana Gas only received a $7 million payment from Egypt in the third quarter for natural-gas supplies because of a “lack of hard currency in Egypt” according to John Tottie, an analyst at HSBC Holdings Plc in Riyadh. Egyptian Natural Gas Holding Co., the state-owned gas company, did not reply to a request for comment on the status of its debt to Dana.

The economic slowdown has prompted Raya Holding, whose nine-month profit dropped an annual 16 per cent, to shift “quite a few of our information technology activities to the Gulf area,” Khalil said by phone yesterday, citing growing markets in Qatar, Abu Dhabi and Saudi Arabia. “If we succeed in getting more business from outside, it will help us in the case of devaluation.” Raya shares are down 37 per cent this year.