beyondbrics

Things are getting from bad to worst for Egypt’s finances. As Egypt’s generals fret about their next move, the country’s foreign exchange reserves are fast disappearing. The latest numbers show net international reserves fell to $22.1bn at the end of October 2011, down from $24bn a month earlier and $36bn in December before the country’s political unrest started.

That’s 10 months in a row of losses. At the current rate of decline there are only 11 months left before the coffers are empty. That should concentrate minds in Cairo – but whether it will is another matter.

Raza Agha of RBS argues that there is even less room for manouver than these headline numbers published on Thursday suggest.

More detailed figures for the end of September, released after a lag by the Central Bank of Egypt (CBE), show that the actual level of liquid reserves – that is, convertible foreign currencies including securities, cash and deposits – may be falling faster than net international reserves.

Agha says in a report that liquid reserves stood at $16.8bn at the end of September 2011, compared to $30.9bn at the end of December 2010, indicating a loss of $14.1bn between January and September, compared with the $12bn change in the net international reserves figure.

By the end of October this loss could have reached $16.1bn, says Agha. The remaining $14.8bn of reserves “barely cover the estimated external financing requirements for 2012, and are barely sufficient for three months of imports.”  Three-months cover is  the danger level for most economists.

It gets worse. Before the global financial crisis, the central bank built up foreign exchange deposits with commercial banks, which were not reported as part of net international reserves and which stood at $7.2bn at the end of 2010.

Agha says: “As of September 2011, they stand USD166.4 million implying that even the CBE’s ‘second tier’ reserve fell by USD7 billion. Summing the decline in liquid and second tier reserves, the CBE could well have lost as much as USD23.1 billion since January.”

Even that’s not the end of the story. First half 2011 balance of payments figures showed a deficit of $10.3bn in a period when the central bank actually lost $17.6bn in liquid and other foreign currency assets, says Agha.

So hard currency is going into capital flight and into the proverbial mattress. Egyptians are even hoarding Egyptian currency, with the level of currency in circulation growing dramatically this year at an annual rate of 25 per cent, compared with 13 per cent previously.

Agha says “there are now serious questions around how long the CBE can continue to keep the EGP stable”.

So Egypt has little choice but to secure international financial support at the International Monetary Fund or elsewhere. The authorities rejected an IMF  financing package in June and a Fund team left Cairo on Thursday without announcing anything. Perhaps Egypt is banking on securing Arab assistance, from Saudi Arabia and/or the Gulf.

Agha concludes: “Whatever the case may be, rising t-bill yields, declining reserves and continued political uncertainties imply one thing only – Egypt needs support, quickly. We remain underweight on Egyptian assets.”

Related reading
The economics of the Arab spring,FT
Investing post Arab Spring, FT video
Egypt: a $3.7bn gleam in the dark, beyondbrics
Egypt file, beyondbrics
Egypt the mounting cost of protest, beyondbrics
The economics of the Arab spring, FT