Egyptian pound drops on unrest

[February 07, 2011]  CAIRO (AP) -- The Egyptian pound hit its lowest level against the U.S. dollar in roughly six years on Monday, while the government looked to raise cash with a $2.5 billion Treasury bill auction as investors assessed the impact on the economy of nearly two weeks of protests calling for the president's ouster.

The dollar was trading at about 5.953 Egyptian pounds by midday -- its lowest level since January 2005. Analysts said the testing point would likely be at the range of 6 or 6.1 pounds.

The government, meanwhile, was to auction 15 billion pounds ($2.5 billion) in Treasury bills on Monday, a step that economists expected would draw in mostly domestic banks after the protests of the past couple of weeks appeared likely to cast an at least short-term pall on the investment climate in the country.

"For confidence purposes, (the bills) will be subscribed, and the local banks will provide most of the buying, if not all of the buying," said John Sfakianakis, chief economist at the Riyadh-based Banque Saudi Fransi. Yield will also be attractive for the those who subscribe at 11-12 percent, he said.

"International banks will take a wait-and-see approach," said Sfakianakis.

For the government, the auction was a necessary confidence-building measure amid worries about capital outflows and a sharp drop in foreign investment. The government offered 8 billion pounds of 91-day bills, 5 billion pounds in 182-day bills and 2 billion in 273-day bills.

Local banks have "enough capacity to take up the issue, and I don't think the Central Bank would take up an issue of this size if they weren't confident it would be successful," said Ahmad Alanani, director of Mideast fixed income sales at Exotix Ltd. in Dubai.

"A successful auction of this size taken up by local banks would send all the right signals that the Egyptian debt markets are back in business," he said.

The protests, which saw tens of thousands of people massing in downtown Cairo for demonstrations that at times turned violent, have raised questions about the impact on the economy. More than 160,000 foreign tourists fled the country in a matter of days last week, in an exodus sure to hammer the vital tourism sector.

Meanwhile, banks reopened on Sunday after a weeklong closure and the government pumped 5 billion into the institutions to ensure liquidity. Millions had been unable to withdraw money for much of the duration of the protests, while businesses had been unable to pay their employees.

The depreciation in the Egyptian pound offered an ominous indication of the challenges ahead.

Analysts have predicted it could drop as much as 25 percent in the short-term, a level which would put it at weaker than 7 pounds to the dollar. It had traded much of last week, while banks were closed, at about 5.84 pounds to the dollar.

"The testing ground is 6 or 6.1 pounds (to the dollar)," said Sfakianakis. "That's where it could go further down, depending on the level of intervention by the Central Bank."

Central Bank officials could not be reached for comment.

International ratings agency Moody's Investors Service said it expects pressure on the Egyptian pound's exchange rate because of the conversion of local currency deposits to foreign currency deposits as the banks reopen.

"The flow will mainly come from foreign investors and high net-worth local depositors, and is likely to diminish the (Central Bank's) foreign currency reserves its capacity to support the banking system's overall foreign currency obligations," Moody's said in a report released Monday.

"Sustained demand to either withdraw or convert deposits into foreign currency is a key heightened risk for Egyptian banks' liquidity positions," Moody's said.

The Central Bank had $36 billion in foreign currency reserves as of the end of December.

Officials, who are still bracing for more potential fallout from the crisis, have kept the country's stock exchange closed.

The Egyptian Exchange's benchmark index shed 17 percent in two days of trading the week before last, before it closed on Jan. 27. Trading may resume on Wednesday, with officials weighing placing limits either in terms of the hours or a cap on losses.

[Associated Press; By TAREK EL-TABLAWY]

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