By Farah Halime
Could Egypt’s new central bank governor Hisham Ramez, who replaces Farouk Al Okdah, signal a shift in policy from tightly controlling the exchange rate of the pound, as it has done for nearly a decade, to introducing a more balanced currency market driven by supply and demand?
Yes, the business community tells Al Arabiya’s Carina Kamel: “The priority now is to have an orderly currency market,” said Osama Mourad, a financial analyst. “We have been able to get rid of the responsibility of the exchange rate which was seen clearly from the new governor’s statement.”
Over the weekend, Ramez sent a strong message to Egypt and the financial world, which are closely watching developments in Cairo, saying: “The bank’s number one priority was overseeing a ‘balanced’ currency market and that the central bank ‘has all the tools needed to intervene’.”
He sought to reassure jittery investors (and simultaneously enter himself into the club of Egyptian officials unruffled about the state of the economy) by saying “there is no reason to worry” about price movements on the Egyptian pound which has lost nearly 6% of its dollar value in the past two weeks. “The situation is not out of control.”
Yet, control is the last word that comes to mind when describing Egypt’s economy.
With demand for dollars still high, almost daily dollar auctions have continued to drive the pound lower.
The scale of dollarisation was also highlighted when Egypt signalled that the $2bn loan from Qatar arrived in December, implying that the money had already been eaten up defending the currency.
What is more worrying, however, is how the transaction exposes the fragility of Egypt’s economy: “Without Qatari aid, Egypt was on course for a full-blown financial crisis and, perhaps, a forced deal with the IMF by February,” Saeed Hirsh of Maplecroft said, according to Reuters.
Once again, Egypt has been bailed-out by its big brothers, giving the government little incentive to make much-needed reforms, including in the costly energy subsidy system.
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Another indication of how Egypt is living hand-to-mouth is the constant rollover of debt.
Egypt’s finance ministry said on Thursday it would offer $1bn of one-year treasury bills for auction on 14 January. This would effectively roll over maturing US dollar-denominated bills from last year.
Though it alleviates pressure on Egypt’s creaking budget, the country will now have to refinance around $2.5bn in 2013. Dependence on local banks to buy into these securities is highly unsustainable.
Economists have said that the rate of spending on interest payments on bonds and bills is now exceeding the rate at which the government spends on energy subsidies. Egypt is spending about 15% or 16% of its budget on these payments now, a considerable amount.
The upside is that Egypt’s treasury yields are attractive to foreign investors who look at emerging and frontier markets. Egypt has among the most attractive yields of the frontier markets, according to Silk Invest, the London-based investment banking boutique, with indicative 1-2 year yields running at 13.1%. Other emerging markets pay from 9.6% for Vietnam, through to 22.9% for Ghana.
Silk Invest CEO Zin Bekkali says in a note to investors:
“Interest rates in developed markets have reached unsustainable levels in both the government and the corporate sectors. Frontier markets currently offer one of the worlds’ most interesting fixed income opportunities with the potential for double digit returns in hard currency, local currency as well as for corporate bonds.”
