Egypt acts to bolster currency

Egypt’s central bank stepped in today to halt a steep fall in the country’s currency.

Meanwhile the stock exchange outlined regulations aimed at thwarting potentially steep losses in the market when it reopens next week.

The Egyptian pound had dropped to near six-year lows against the US dollar over the past couple of days after banks that had been closed for a week because of the protests reopened. The pound closed today at 5.870 to the US dollar, rebounding sharply from the previous day’s close of 5.9615 to the dollar.

John Sfakianakis, chief economist with the Riyadh, Saudi Arabia-based Banque Saudi Fransi, says there was no announcement about how much money the central bank pumped into the currency market, “but the intervention is pretty obvious.”

The move came as Egypt struggled to contain the fallout from more than two weeks of protests that have rattled investors. The pound’s steep losses reflected an outflow of capital many had expected to see as foreigners pulled their money and others converted local currency deposits to foreign currency.

“An aggressive move like this is nothing other than an intervention,” said Khalil El-Bawab, head of fixed income for the Cairo-based investment bank EFG Hermes.

In a bid to bolster confidence, the central bank on Monday auctioned off 13 billion pounds ($2.2bn) in Treasury bills to raise cash – an offer the Finance Ministry said was significantly oversubscribed.

But the buyers were said to be almost exclusively local banks, again underscoring the wariness of the international giants to enter the market at a time of tremendous political flux and uncertainty in the Arab world’s most populous nation.

It remained unclear whether the intervention would be enough to prop up the pound given the lingering uncertainty in the country and worries about the scope of the economic losses.

“It could very well be that we this back-and-forth continuing,” said Sfakianakis, referring to the currency fluctuation. But, he added, “it’s a signal that they’re going to begin to be aggressive about their support for the currency and will definitely take the necessary pre-emptive measures to prevent a fall in the pound.”

“The issue is how long can they sustain this, and whether the reward is higher than the risk,” Mr Sfakianakis said. The risk in this case is how much of the country’s foreign currency reserves they are willing to use to support the pound. Egypt’s central bank held about 36 billion dollars in foreign currency reserves as of December.

Separately, the Egyptian Exchange announced measures to be implemented once the market reopens on Sunday after what would be a two-week closure. The new measures included a shortened, three-hour session, and a halt to the pre-market auction in which share prices could easily fall steeply ahead of the official opening of the market.

The exchange’s benchmark index fell about 17% in two days of trading before the market closed, and investors were worried that the first trading session to begin after the protests virtually paralysed the city and occasionally collapsed into violence would see massive losses.