Egyptians Fret Over Pound as IMF Backs Dollar Sales: Arab CreditAlaa Shahine and Mariam Fam
Raya Holding Co. Chief Executive Officer Medhat Khalil says he is going for the lesser of two evils by switching his dollar debt into Egyptian pounds.
The information technology company is opting to pay higher interest rates on the pound rather than bet how far the currency, which weakened to a record, will drop as the central bank seeks to protect dwindling foreign reserves. The average yield on one-year Treasury bills surged 175 basis points last year to 13.539 percent, compared with 0.14 percent for similar-maturity U.S. Treasuries, central bank data show.
The pound’s drop accelerated after the central bank began daily dollar auctions with a limit on how much each bank can buy amid a political crisis that disrupted International Monetary Fund talks. While the IMF welcomed the policy, the measures add costs to average Egyptians and businessmen such as Khalil are struggling to hedge against what investment bank EFG-Hermes Holding SAE called a “mini devaluation.”
“We used to have quite a bit of debt in dollars because we used to get reasonable interest rates, but in the past couple of weeks we’ve been changing that,” Cairo-based Khalil said by phone Dec. 30, declining to give details on the loan size.
The central bank, whose reserves have plunged almost 60 percent to $15 billion since the 2011 uprising that ousted Hosni Mubarak, sold about $300 million in four auctions this week. The pound depreciated 0.5 percent to 6.4211 a dollar, extending its decline this week to 3.7 percent, at 4 p.m. in Cairo.
Banks and exchange houses have started charging customers seeking foreign currencies fees of as much as 2 percent for any sale. The central bank issued new instructions to lower the fees to between 0.5 percent and 1 percent for individuals and companies wishing to buy dollars “for non-commercial purposes,” according to Al Mal newspaper.
“Egypt’s new exchange rate regime has brought greater transparency and a depreciation of the pound but also highlights a serious shortage of foreign exchange,” Fitch Ratings said today. “For the system to work, confidence needs to be restored quickly, starting with agreement on an IMF” program, it said. Forward contracts, which provide guidance for investor expectations, show the currency may weaken 14 percent in 12 months.
The drop comes amid a power struggle between Islamists and opponents of President Mohamed Mursi, who pushed a divisive constitution through a public referendum and delayed the $4.8 billion IMF loan agreement last month after he suspended tax increases linked to the program.
The political crisis raised government borrowing costs after Standard & Poor’s lowered Egypt’s credit rating to the same junk level as Greece and Pakistan on Dec. 24. The Finance Ministry canceled the sale of 6 billion pounds in one-year and six-month treasury bills Dec. 27 and missed its target in a bond sale four days later by 60 percent.
The return of international investors hinges in part on the government’s ability to secure IMF support, said Stephen Charangwa, London-based associate portfolio manager at Silk Invest Ltd.
“Obviously, the big elephant in the room remains the outstanding IMF deal, which would be the catalyst for most investors,” he said by phone yesterday. “The fact that it has been agreed, then pushed back, left the market in limbo with no clarity as to when exactly it would be finalized.”
Fitch said an agreement with the IMF “is essential for more substantial and sustainable external support and for restoring domestic and external confidence in the pound.” While the currency’s drop will probably have little fiscal impact, the effect on inflation “will be more pronounced,” it said.
Raya Holding has based this year’s budget on an average exchange rate of 7 pounds a dollar, assuming the government secures the IMF loan at the start of the year, Khalil said. Raya shares surged 3.4 percent yesterday to 5.85 pounds, valuing the company at 376 million pounds ($59 million.)
The local currency will “never” weaken to the 7-pound level, Finance Minister Momtaz El-Saieed said yesterday. Prime Minister Hisham Qandil said the government will invite the IMF to Cairo this month to resume talks. The Washington-based lender also welcomed the central bank’s policy to protect reserves to “ensure that the country will continue to maintain a level of international reserves that can support” trade and payments, according to a Jan. 1 statement.
“The likely signing of the IMF deal in a few weeks could act as a potential source for stabilizing the pound in 2013,” Mohamed Abu Basha, an economist at Cairo-based EFG-Hermes, wrote in a report Dec. 31.
Egypt missed its target at a sale of treasury bills today and yields jumped. The government raised 4.5 billion pounds in one-year and six-month treasury bills, 25 percent below the amount it initially sought, according to central bank data. The average yield on one-year notes surged 78 basis points to 14.32 percent, and on six-month debt it rose 80 basis points to 14.10 percent.
“At the moment we are reviewing what levels present the appropriate buying opportunity,” Charangwa said. “It will be interesting to see how yields respond across the curve given the recent flow of mainly credit-negative news.”
Some businessmen such as Sameh El-Meligy, who imports home appliances, aren’t taking anything for granted.
“I have a shipment coming soon and I won’t sell it to retailers until I figure out where the pound is going,” he said by phone yesterday. “I am also thinking about raising prices between 5 percent to 10 percent on some products.”
Some exchange houses in Cairo turned away customers seeking foreign currency, citing lack of supply to meet a surge in demand.
“I can’t believe what’s going on,” Mohamed Youssry, a 25-year-old doctor, said after visiting three bureaus in an attempt to buy 20,000 pounds worth of pounds sterling to fund an unpaid internship in the U.K. “I am sure there will be people on the black market selling for a better rate.”