International reserves are again heading south, this time at a faster pace, Sherine Abdel-Razek
With all foreign currency generating sources being drained after the uprising that toppled former president Hosni Mubarak's regime in January, it was expected that Egypt's net international reserves would be hard-hit.
However, while reserves were being depleted since February from their all-time high of $36 billion in early January, the rate of the decline stabilised at around 3-4 per cent each month from May to September.
But October's figures, released last week, were worrying. The reserves decreased by $1.93 billion last month, the highest monthly loss to reach $22.1 billion in October, the Central Bank of Egypt (CBE) said on its website. This brings the retreat month-on- month to eight per cent compared to four per cent it shed in September. Year-on-year, the reserves shed 37.9 per cent of their value in October compared to 32 per cent in September.
The head of the dealing room at one of Egypt's commercial banks said that last month witnessed more foreign investors selling their investments in local treasury bills and other assets amid the uncertainty surrounding the political situation. Speaking on condition of anonymity, he added that after foreigners sell their holdings, they change their money to dollars, leading to more withdrawals from reserves.
The banker also pointed out that one factor that accelerated the pace of decline was the Maspero incident in which clashes between Copts and the military ended the lives of at least 25 civilians, together with the controversy on the future military role as reflected by what is known as El-Silmi document, named after Deputy Prime Minister Ali El-Silmi. "Both send negative messages about the status in Egypt, at least in the short and medium terms, and give investors a reason to flee the country," he explained.
According to CBE statistics, foreign holdings of Egyptian T-bills fell to LE17.07 billion in August, from LE59.35 billion before the uprising.
This was equivalent to $2.8 billion and analysts at the leading investment bank, Beltone, believe that a significant part of these reserves is expected to have left the country in September and October, "on the back of doubts surrounding the Egyptian government's ability to finance its deficit and pay back its debt, adding pressures on its debt sustainability and ambiguity of political situation."
Egypt's last auction to sell three-year and five-year bonds, worth LE1 billion on Thursday, was only partially covered despite the fact that interest rates exceeded 14 per cent.
The yield on Egyptian 91-day bills was 12.385 per cent at the latest auction, up from 9.29 per cent a year ago, and six per cent four years ago.
Economists believe that the drop in reserves was also partly caused by the CBE's continuous buying of the pound to support it against the dollar in the local market. The local currency remained almost flat in October, marking a slight depreciation of 0.1 per cent, averaging LE5.968 per dollar. However, and despite the fact that the pound exchange rate remained flat since May, the pound at the end of last week traded as low as 5.985 to the dollar, its weakest since 4 January 2005. Local traders believe that the CBE intervened early this year to support the value of local currency against the greenback, as the latter was trading at LE5.96 on Tuesday.
The economic turmoil in the Eurozone has also stripped the pound of a part of its strength as the dollar gained significant ground against the euro in the past month, on the concern that Italy's increasing borrowing costs might lead to a further deepening of the Eurozone debt crisis.
Officials quoted by the local media say the reserves are still at the "safe level" as they cover 3-4 months of imports. However, they unanimously agree that if a dangerous reserves level is reached in the next few months, Egypt would resort to the International Monetary Fund (IMF) to help cover its needs.
Egypt did not ask for an IMF loan when the institution sent a delegation to Cairo.