Black Market Dollars Put Egyptian Economy on Alert: Currencies

When two Egyptian banks refused to give Ahmed El-Rifai the dollars his digital media company needed to pay Facebook Inc. last month, he turned to a more reliable source: the black market at a premium of about 8 percent.

“I even had to wait two days to be able to cash a dollar check at the bank,” El-Rifai, 33, managing director of Cairo-based Egyweb, which sells online ads for Facebook, said by phone Feb. 5.

The emergence of an unregulated market shows wavering faith in Egypt’s pound as the biggest slide in currency reserves in at least 15 years prompts the central bank to curb access to dollars. The pound has weakened 5.3 percent in 2013, making it the world’s fourth-worst performer after the Venezuelan bolivar, Malawian kwacha and the yen, according to data compiled by Bloomberg. Non-deliverable forwards show traders expect it to weaken 8 percent in three months from 6.7180 a dollar today.

Two years after the ouster of President Hosni Mubarak in an uprising, an escalation in violence between opponents of Islamist President Mohamed Mursi and police has dashed hopes of an economic recovery. More than 50 people were killed in clashes in the past two weeks. The upheaval has delayed talks with the International Monetary Fund for a $4.8 billion loan that analysts at Bank of America Merrill Lynch say is crucial to stabilize the currency.

Rate Pressure

Net international reserves have tumbled to $13.6 billion, the lowest level since at least 1997, from $36 billion in 2010, according to central bank data on Bloomberg, prompting the regulator to take steps to limit the supply of dollars and exchange rate movements.

“I know that the central bank is taking steps to reduce the black and gray markets for foreign exchange,” U.S. Ambassador Anne Patterson said in a speech at the Rotary Club of Alexandria Mariout yesterday. Still, the “longer Egypt restricts access to foreign exchange, the more it will undercut investment interest in the country. It is a simple fact of life.” The U.S. is the biggest IMF shareholder.

The currency crisis pushed monthly inflation to the highest in more than two years in January, according to government data released yesterday. As a result, Central Bank Governor Hisham Ramez, who assumed the post Feb. 3 amid the worst slump in the pound since 2003, may raise interest rates this year by as much as 2 percentage points to 11.25 percent, the highest since 2009, even as growth slows, according to Mohamed Abu Basha, an economist at EFG-Hermes Holding SA in Cairo.

‘Thin Ice’

Ramez and other central bank officials didn’t respond to three e-mails seeking comment about the unregulated currency market. The governor also didn’t answer a call to his mobile phone yesterday.

Some banks, including state-owned National Bank of Egypt, the country’s biggest, have already raised their rates by that amount to entice clients to keep savings in pounds. Illegal dealers are charging customers a premium of between 3 percent to 5 percent for dollars, EFG-Hermes said last week.

Egypt is “walking on thin ice,” Jean-Michel Saliba, a London-based economist at Bank of America Corp., wrote in a Feb. 6 report to clients. “Domestic dollar demand is likely to strengthen and the gap between and official and parallel rates is likely to widen.”

Standard & Poor’s cut Egypt’s credit rating in December by one level to B-, putting it six steps below investment grade and on par with Greece. The rating company assigned a “negative” outlook, indicating a further downgrade is likely.

Managed Float

In the bond market, the average yield on five-year local-currency bonds jumped 61 basis points at the last sale on Feb. 4 to 14.79 percent, the highest since October, central bank data on Bloomberg show. Rising interest rates prompted the Finance Ministry to cut the target for bond sales this quarter by 44 percent, choosing to focus on short-term Treasury bills, according to data released Feb. 7.

Egypt, the Arab world’s most populous nation, abandoned a dollar peg for a managed float in 2003 amid a currency crisis that prompted police to shut down several exchange houses on allegations of hoarding dollars. The central bank introduced an interbank market for the U.S. currency in 2004 in an effort to restore stability.

Pound Restricted

A 60 percent drop in reserves since the 2011 revolt prompted the regulator to start dollar auctions on Dec. 30, capping the amount each lender can buy to control supply. Less than 33 percent of bids have been accepted by the central bank, signaling overwhelming demand for dollars even as the pound depreciated, according to the Bank of America report.

Ramez later restricted the pound’s move on the interbank market to 1 piaster against the dollar from the weighted average price at the most-recent dollar auction, instead of the previous 0.5 percent band. He also capped the price at which banks can sell dollars to as low as 1 piaster above the official rate, from 3 piasters. There are 100 piasters to the pound.

The implied yield on one-month NDF, which reflects the costs of borrowing pounds in the overseas market, jumped to a record 71 percent last month, surpassing the levels seen during the so-called Arab Spring, according to data compiled by Bloomberg. The gauge was at about 18 percent in February 2011 when Mubarak was ousted, and 61 percent in December. Barclays Capital sees the currency falling 5.6 percent to 7.11 per dollar by June.

Buying Time

Ramez’s policies may restore “some confidence to the market by conserving dollars,” Khaled Abdel Hamid, head of treasury at Cairo-based United National Bank Egypt, said in a telephone interview Feb. 7. “The measures are buying the central bank time until political stability is restored and the economy starts to recover.”

Prime Minister Hisham Qandil said last week the government will invite the IMF to review an economic program linked to the $4.8 billion loan. The IMF “remains committed to support Egypt and its people,” Wafa Amr, a spokeswoman for the fund, said in an e-mailed response to questions Feb. 5.

Patterson, the U.S. ambassador, criticized Egyptian politicians for their management of the economy.

“The most catastrophic path is for the government and the political leadership of the country -- whether in power or in opposition -- to avoid decisions, to show no leadership, to ignore the economic situation of the country,” she said, according to an e-mail transcript of her speech. “The talks with the IMF need to be brought to closure.”

Political Tension

The opposition wants Mursi to accept responsibility for the latest violence, set up a national unity government and a committee to amend an Islamist-backed constitution they say was forced through a referendum. The president has repeated a call for a national dialogue, while dismissing the unity government option ahead of parliamentary elections that could be held in a couple of months.

Egyptians rallied against Mursi to mark the second anniversary of Mubarak’s departure today. Dozens of protesters temporarily blocked the 6th of October bridge spanning the Nile in central Cairo, chanting slogans against Mursi and his Muslim Brotherhood, the state-run Middle East News agency said.

The escalating political tension will curb the $256 billion economy, according to Fitch Ratings, which downgraded the credit rating of the Northern African nation one level to B on Jan. 30. Growth will average 3.3 percent in fiscal 2013 and 2014, “well below” the pace necessary to accommodate the 700,000 people joining the labor market every year, Fitch said. Growth averaged 5.3 percent between 2005 and 2011.

Cairo Tailor

Central-bank policy has brought the exchange-rate premium on the black market from 7.2 a dollar in mid-January to 6.87 on Feb. 7, according to a dealer who asked not to be identified because the practice is outlawed. That hasn’t slowed the flow of customers to his Cairo tailor shop, helping maintain a volume of about $100,000 a day, he said.

Others, like Motaz Mohamed, who works for a limousine service in Cairo, are trading currencies to boost their income amid Egypt’s worst slowdown in a decade. Mohamed, whose salary hasn’t exceeded $300 after a 16-year career, said in a Feb. 7 interview that he buys dollars from tourists who need pounds and sells them to dealers including the Cairo tailor.

“The market’s sole stabilizer remains the IMF, though the potential deal is slowly losing its significance as the gap between demand and supply for dollars continues to rise, especially given the intensification of the political deadlock,” Abu Basha at EFG-Hermes wrote.

The crisis has made Egyweb owner El-Rifai “abandon optimism, and just focus on reality,” he said.

“People are optimistic about Hisham Ramez, but it’s now more than just managing reserves or the exchange rate, the country is in a real crisis,” he said. “One man can’t perform miracles.”