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Egypt Banks Risk Run as Week of Protests Hits Economy

Egypt's Banks Risk Deposit Run as Violence Hits Economy
Demonstrators use a shoe and broom to strike a picture of Egyptian President Hosni Mubarak during a protest at Tahrir Square in Cairo. Photographer: Mohammed Abed/AFP/Getty Images

Egypt’s banks may risk a surge in customer withdrawals when they open for business, placing them among companies worst hit by the nationwide uprising against President Hosni Mubarak.

“A run on the banks would be the biggest concern, which is possible in the current situation,” Robert McKinnon, chief investment officer at ASAS Capital in Dubai, said in a telephone interview. Authorities are likely to keep the financial system closed to avert the risk, he said.

Egypt’s banks and markets stayed shut today after a week of clashes in the most populous Arab country that left as many as 150 people dead. Tanks are guarding banks and government buildings in Cairo that are vulnerable to looting, state television said. The EGX 30 stock index had a two-day drop of 16 percent through Jan. 27, with Commercial International Bank Egypt SAE, which accounts for more than one-fifth of the benchmark, falling 12 percent. Markets throughout the Middle East declined on concern the unrest may spread.

Mubarak responded to accusations of presiding over a corrupt and repressive regime by sacking the Cabinet and appointing a vice-president, intelligence chief Omar Suleiman, for the first time. The measures weren’t enough to prevent more clashes as thousands defied a curfew in Cairo and other cities last night. Many bank offices and ATM machines were damaged.

Banks ‘Will Function’

Central Bank Governor Farouk El-Okdah said in a telephone interview Jan. 29 that his bank has $36 billion in reserves, enough to accommodate investors should they wish to withdraw funds. His deputy, Hisham Ramez, said interbank lending “will function properly” when banks open. He said the security situation will determine when that is possible. Financial institutions will stay closed tomorrow, state television said.

Asked about the risk of a bank run, Mohamed Barakat, chairman of state-run Banque Misr and head of the country’s banking association, said in a telephone interview that Egyptian lenders are “very liquid,” with average loan-to-deposit ratios of 53 percent.

Still, “when banks open, people will rush in to withdraw their money,” said Mohammed Yasin, chief investment officer at Abu Dhabi-based CAPM Investment. While that’s a reason for authorities to keep them closed, “life will not normalize” under such conditions because “people need access to money to buy food and basic daily necessities,” he said.

No Cash Left

Many automated teller machines or ATMs in Cairo had run out of cash today, and queues formed at others. Stores refused to take credit cards because of the banking system’s closure.

The Egyptian interbank offered rate, the rate banks charge to lend to each other, is at a 16-month high of 8.5 percent. The country’s credit rating was cut to Ba2 from Ba1, and its outlook to negative from stable, by Moody’s Investors Service today.

CIB, the biggest publicly traded lender, had assets of 64.1 billion Egyptian pounds ($11 billion) and deposits of 54.6 billion pounds at the end of 2009, according to data compiled by Bloomberg. London-based private-equity firm Actis Capital LLP became the largest shareholder in the bank in July 2009, buying a 9.3 percent stake for $244 million.

Hisham Al-Arab, chairman of CIB, said in an interview with Bloomberg Television today that the bank’s ATMs were allowing limited withdrawals in non-curfew hours, and only four branches had been damaged in the rioting. Asked if the bank has enough liquidity to meet customer demand, he said: “For several months, we are fine.”

Societe Generale, Allianz

National Societe Generale Bank, the second-biggest listed bank, is controlled by Paris-based Societe Generale. It had 43.7 billion pounds of deposits at the end of last year.

Insurance companies will also be hit by a flood of claims for properties and businesses damaged during the clashes, Yasin said. Insurers with businesses in Egypt include American International Group Inc. and Allianz SE.

The economic impact of the worst unrest in Mubarak’s three-decade rule won’t be confined to the finance industry. Also at risk are inflows from tourism and remittances by Egyptians working abroad, which together with revenue from the Suez Canal are the country’s main sources of foreign currency.

‘Two of Three’

“Two of the three will suffer,” as tourists stay away and expatriates will be reluctant to deposit their money in Egyptian banks in the current climate, said Brad Bourland, chief economist at Jadwa Investment in Riyadh. Revenue from Suez won’t be hurt unless the canal is closed, a measure that currently seems unlikely, he said.

Suez shipping “still seems to be working OK,” Charlie Fowle, chairman of London-based shipbroker Galbraith’s Ltd., said in an e-mail today. The canal carries more than 4 million barrels of oil a day, and concern that shipments may be disrupted by the unrest helped push crude up 4.3 percent on Jan. 28. It pared that loss today, dropping 0.5 percent to $88.94 at 9:45 a.m. in New York.

Remittances were worth $9.5 billion in the fiscal year through June, according to central bank data.

Tourism earned Egypt, whose attractions include the pyramids of Giza and the Red Sea coast, as much as $13 billion last year, according to government estimates. Shares in Talaat Moustafa Group, which owns the Four Seasons Hotel Cairo, slumped 13 percent on Jan. 27.

A growing tourist industry helped the economy expand at an average annual rate of 7 percent in the three years through June 2008, the pace that the government says is needed to create enough jobs for a growing working-age population in the country of 80 million. Growth slowed after the global financial crisis, and official forecasts for last year were about 6 percent.

Foreign Investment

Foreign direct investment in Egypt, which fell 17 percent to $6.8 billion in the last fiscal year, may decline further as a result of the upheaval, said Rami Sidani, Head of Investment at Schroders Middle East in Dubai.

Companies that made acquisitions in Egypt include Amsterdam-based brewer Heineken NV, which bought Al Ahram Beverages Co. for $287 million in 2002. Heineken has stopped operations in the country until further notice on safety concerns and is evacuating expatriate employees, spokesman John Clarke said in a telephone interview yesterday.

Nissan Motor Co., Japan’s second-biggest automaker, said it has closed its factory in Egypt, which made 10,000 cars last year, until Feb. 3. BG Group Plc and Statoil ASA halted drilling in Egypt today.

International businesses will stay away “until there’s more visibility on what’s happening politically,” Sidani said. In the meantime, the economy “will see a major deterioration.”

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