Egypt Upheaval on Streets, Market Blocks Rate Move: Arab CreditMariam Fam
Egypt’s central bank kept interest rates on hold today, as political tensions and a sliding currency block an increase to prop up the pound or a cut to boost a barely growing economy.
The bank kept its overnight deposit rate at 9.25 percent, a decision forecast by all six economists surveyed by Bloomberg, and the lending rate at 10.25 percent. It was the first rate meeting since the bank started auctioning dollars to local lenders on Dec. 30. The pound has weakened more than 7 percent, the most among emerging-market currencies, since the sales began. One-year government yields are about three times Lebanon’s and higher than similarly rated Pakistan.
The rate decision came after a wave of deadly clashes that erupted on the eve of the second anniversary of the uprising that ousted Hosni Mubarak, imposing a new obstacle to Egypt’s efforts to revive the economy. The unrest, cited by Fitch Ratings for a downgrade of Egypt’s debt yesterday, has left more than 50 people dead and led President Mohamed Mursi to declare a state of emergency and impose curfews in three provinces.
“Growth is too weak to hike, but political risk and the pressures on the currency are too strong to cut,” Liz Martins, Dubai-based senior economist at HSBC Bank Middle East Ltd., said by e-mail. “If they do have a bias, it will be to the upside, to support the currency.”
Since the start of the uprising in January 2011, the central bank has changed the key deposit rate only once, raising it by a percentage point in November of that year. While it cited inflationary pressures for the move, most economists said it was intended to prevent a run on the Egyptian pound.
Egypt paid 14 percent on average to sell one-year treasury bills at an auction last week. That compares with the 5.35 percent Lebanon paid this month to sell similar-maturity debt. Pakistan, which like Egypt is rated B- at Standard & Poor’s, paid 9.24 percent.
The government has sold 38 percent of the 10.4 billion pounds ($1.6 billion) it sought to raise so far this quarter at auctions of securities that mature in more than one year.
Egypt’s “fiscal position has worsened” and “serious divisions have opened within society, contributing to sporadic outbursts of violence,” Fitch said yesterday. It lowered the rating by one step to B, five below investment grade. Egypt’s 5.75 percent dollar bonds due in April 2020 extended losses today, after falling the most since Mursi’s June election yesterday. It traded at 6.43 percent at 6:30 p.m. in Cairo.
Moody’s Investors Service also said civil unrest adds credit-negative pressures on the economy and increases uncertainty about nation’s ability to negotiate a support program with the International Monetary Fund.
Egypt’s economy is still struggling to recover from the turmoil that followed the revolt. It has grown at about 2 percent a year in the last two years, the slowest pace since the early 1990s and barely above the rate of population growth. Tourism and investment have plunged.
An episode during the Jan. 29 demonstrations in Cairo highlighted the difficulty of reviving tourism, one of Egypt’s main sources of foreign currency. Masked men who “infiltrated the ranks of protesters” stormed a five-star hotel downtown and looted it, the state-run Middle East News Agency reported.
Talks on a $4.8 billion loan from the IMF, which the government says is necessary to boost investor confidence and unlock other funds, have repeatedly stalled amid political bickering.
“The lack of consensus-building, reform implementation and clarity over the timetable of discussions with the IMF is extremely worrying,” said Alia Moubayed, London-based senior economist at Barclays Plc. “Without progress on these fronts, piecemeal bilateral financial backstopping will not be sufficient to contain growing threats to macroeconomic stability.”
Qatar, Saudi Arabia and Turkey are among countries that have delivered or pledged financial support to Egypt.
The latest delay in the IMF loan talks came last month after Mursi suspended tax increases amid political tensions.
If unrest “is sustained for long then there’s no guarantee” that any IMF-linked reforms that the government commits to can be implemented, Jean-Michel Saliba, London-based economist at BofA Merrill Lynch, said by phone. “Energy subsidy reform could prove problematic, in particular.”
Egypt’s five-year credit-default swaps have jumped 61 basis points since Jan. 25 to 503 yesterday, according to data provider CMA, making Egyptian debt more expensive to insure than Iraq’s.
Egypt’s foreign-exchange reserves have declined about 60 percent since the end of 2010. The outlook for the currency, which extended losses today to 6.715 a dollar, “hinges crucially” on the outcome of negotiations with the IMF, Capital Economics said in a research note on Jan. 29.
“If talks go as planned and a deal is secured, we see the pound undergoing an ‘orderly’ devaluation” to about 7.50 per dollar, while further delays could see a slump of as much as 50 percent, it said.
The currency may drop to 7.07 per dollar this quarter, according to the average estimate of nine economists surveyed by Bloomberg this week.
A weaker pound may trigger inflation, currently near a seven-year low at 4.7 percent. That is set to rise, according to Cairo-based investment bank EFG-Hermes Holding SAE, which forecasts an average rate of 7.7 percent this year.
Also, the country is “very poorly placed” to benefit from a currency decline, said Oliver Coleman, an analyst at U.K.- based risk adviser Maplecroft. “Egypt’s industrial base is struggling to maintain output amid factory closures and strikes, reducing the country’s ability to increase exports with the weaker currency.”