Plane-Crash Impact Stalks Pound as Egypt Raises Defensive Walls

  • Central bank said to have forced banks to strengthen pound
  • Pharos Holding says steps may be precursor to pound flotation

Egypt’s attempt to preempt a collapse in the currency isn’t convincing investors it can avoid an eventual devaluation.

The pound’s forward contracts traded near the weakest on record and its implied value based on stock trades declined in defiance of a surprise move by the central bank to strengthen the currency and inject banks with dollars. The suspected bombing of a Russian airliner flying out of the Sharm El Sheikh resort last month has hammered Egyptian markets, leaving bond investors with the biggest losses in emerging markets in November.

There’s "not a chance" the central bank can avoid devaluation, Per Hammarlund, chief emerging-markets strategist at SEB AB in Stockholm, said by e-mail Wednesday. "The central bank simply doesn’t have enough reserves to prop up the pound. It will not be able to hold on for much longer as one of the main foreign-exchange earners, the tourism industry, is taking a big hit."

The plane crash, which led Russia to halt all flights to a country that relies on visitors for foreign-currency income, has put Egyptian policy makers on the defensive trying to deter speculation the pound will be devalued for the fourth time this year. Bolstering the managed currency is getting harder after the central bank burned through almost all of the $6 billion in aid it received from Gulf Arab allies in April, leaving enough foreign reserves to cover just three months of imports.

Egypt's pound has lost a quarter of its value since the 2011 Arab Spring as reserves tumbled.

Gauging what Egypt will do next is becoming harder for investors after central bank Governor Hisham Ramez announced his resignation last month. His replacement, Tarek Amer, won’t take over until Nov. 26. Ramez named his deputy, Gamal Negm, as caretaker governor for the remainder of his term, Ahram Online reported on Wednesday, citing the bank’s spokesperson.

Central bank officials weren’t immediately available to comment when contacted by Bloomberg.

Regulators ordered lenders to strengthen the currency by 2.6 percent to 7.83 per dollar, without giving a reason, according to three bankers familiar with the move, who asked not to be identified because they aren’t authorized to speak publicly. That marks the first appreciation since the one that coincided with the military’s ouster of Islamists from power in July 2013. The central bank maintained the exchange rate at another dollar sale to banks Thursday.

The overseas listings of Egypt’s three most liquid stocks were trading at an implied value of 9.49 per dollar as of 11:18 a.m. in London. That’s the cheapest since Bloomberg started tracking the data in April. Six-month non-deliverable forward-rate agreements retreated to 9.65 a dollar, 3.6 percent weaker than their level before Russia suspended commercial flights to Egypt on Friday.

The black-market exchange rate fell to a record yesterday before appreciating to 8.55 a dollar on Thursday, according to the average quotation of four dealers surveyed by Bloomberg in Cairo and Alexandria.

‘Big Surprise’

Policy makers also gave banks enough dollars to meet a quarter of their clients’ needs to cover imports of basic goods, two of the bankers said. The amount exceeded $1 billion, Al Mal newspaper reported Thursday.

Days earlier, state lenders hoisted the rate they pay on local-currency deposits to try to draw more cash from the nation’s 90 million people, while President Abdel-Fattah El-Sisi promised earlier this month to reduce prices of basic goods for Egyptians by the end of November.

The appreciation was "a big surprise,” according to Jean-Paul Pigat, an economist at Dubai-based Emirates NBD PJSC. “The fundamental pressures on the pound are still to the downside. Anyone who thinks this is a trend change is mistaken."

The cost of insuring Egyptian debt against default was the highest since April, climbing 17 basis points to 433 on Wednesday. The nation’s Eurobonds have lost about 2 percent since the Russian Metrojet carrier crashed on Oct. 31 through yesterday, the most in the Bloomberg U.S. Dollar Emerging Market Sovereign Bond Index.

Pound Flotation

Egypt is bracing for a drop of 2.2 billion pounds ($280 million) of revenue per month due to Russia’s decision to halt flights countrywide and the U.K.’s move to stop travel to Sharm, Tourism Minister Hisham Zazou said Wednesday. The potential loss of income means Egypt will be forced to turn to the International Monetary Fund for cash, according to Hany Genena, chief economist at Cairo-based investment bank Pharos Holding.

The government has struggled to reinvigorate the economy since the so-called Arab Spring uprisings of 2011, with growth forecast to remain below levels that preceded the revolt, according to a Bloomberg survey of economists.

"A flotation of the pound is a major requirement for an IMF deal," Genena said on Wednesday. The central bank’s move "seems to be the first step to establish two-way volatility for the pound, in preparation for a flexible exchange-rate regime."

(An earlier version of this story corrected CDS data in the 11th paragraph.)

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