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Egypt Revolts; starting to dump dollars

Posted by Olog-hai on Sun Dec 30 04:52:28 2012, in response to Egypt Revolts!, posted by JayZeeBMT on Fri Jan 28 16:01:55 2011.

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Bloomberg

Egypt to Start Dollar Auctions as Reserves Hit ‘Critical’ Level

By Alaa Shahine & Tarek El-Tablawy
Dec 30, 2012 2:59 AM GMT-0500
Egypt’s central bank will start foreign-exchange auctions today after appealing to Egyptians to scale back their use of dollars to avert a currency crisis fueled by the country’s political turmoil.

The central bank said yesterday it will hold auctions to buy and sell dollars periodically after foreign-currency reserves dropped to the “minimum and critical level that must be preserved.” They plunged almost 60 percent to $15 billion since the revolt that ousted Hosni Mubarak almost two years ago. That covers three months of imports, central bank data show.

The move, announced hours after President Mohamed Mursi called for unity to end more than a month of escalated protests, is the latest attempt by the regulator to curb speculation that Egypt will devalue the Egyptian pound as the unrest delays an International Monetary Fund loan. The currency, subject to managed float, has weakened 1.2 percent this month while forward contracts show investors expect a 15 percent drop in 12 months.

The auctions “are one of the central bank’s final defense lines to prevent a disorderly devaluation of the pound as it awaits the resumption of negotiations with the IMF,” Mohamed Abu Basha, a Cairo-based economist at investment bank EFG-Hermes Holding SAE, wrote in a report. The auctions “will give a clear and transparent level of pricing for the local currency that market participants can monitor,” he wrote.

National Industries

The central bank called on Egyptians to “ration” their foreign currency use and support national industries. Egypt, the world’s biggest wheat importer, abandoned a peg to the dollar in 2003 after foreign reserves plunged. The pound weakened 0.3 percent last week to 6.1858 a dollar, near the lowest level in eight years.

Mursi, an Islamist politician elected in June, called on his opponents to work with the government to stabilize the country. His critics, including Nobel laureate Mohamed ElBaradei, accuse the president and his allies of dividing the nation after supporting the passage of a constitution they say increases the role of religion and infringes on basic rights.

“It is now time for us to work toward the advancement of the Egyptian people as whole,” Mursi said in his first speech before the upper house of parliament, which now serves as the country’s only legislative power until parliamentary elections, expected in two months. “There is no room for tyranny, discrimination or the absence of social justice. Regardless of the differences, all citizens are equal before the law and under this constitution.”

Borrowing Costs

Mursi’s opponents and his Islamist backers clashed in the weeks preceding passage of constitution, which was approved by a majority of 64 percent in a two-stage referendum earlier this month. The Islamists said it was necessary to push through the constitution to revive the economy, which grew 2.2 percent in the fiscal year that ended in June, compared with about 5 percent in the year that preceded the uprising.

The political turmoil has prompted Mursi to delay a $4.8 billion IMF loan agreement, which his government says is crucial to lower borrowing costs and restart foreign investments. Egypt’s credit worthiness was also lowered at Standard & Poor’s last week to the same junk level as Greece and Pakistan, raising the government’s borrowing costs.

Egypt canceled the sale of 6 billion pounds ($970 million) in six-month and one-year treasury bills Dec. 27. The Finance Ministry plans to raise 4 billion pounds in nine-month notes today, according to central bank data on Bloomberg.

The central bank said it was committed to honoring external debt payments, and called the financial position of the banking sector “is strong and sound.” S&P lowered the credit ratings of three Egyptian banks, including Commercial International Bank Egypt SAE (COMI), the biggest publicly traded lender, on Dec. 26.

The foreign-exchange auctions “will also aim, in our view, to limit speculation in the local market,” Abu Basha of EFG- Hermes wrote. “The next few auctions will be critical in setting up a trend for the local currency.”


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