Monday, Dec 31, 2012


   (From THE WALL STREET JOURNAL) 
   By Matt Bradley

CAIRO -- Egypt's currency plumbed new depths on Sunday as policy makers tried to reassure the public and investors that they can prevent a full-scale currency devaluation while still repairing Egypt's budget deficit.

The country's worsening economic crisis comes after President Mohammed Morsi isolated his political opponents to push through Egypt's Islamist-leaning constitution, sparking weeks of riots, protests and political uncertainty.

That added to delays in a $4.8 billion International Monetary Fund loan many policy makers see as Egypt's last lifeline to restore its dwindling foreign-exchange reserves. The IMF in December agreed to Egypt's request to delay aid consideration, after warning that economic uncertainties over the constitutional conflict could scuttle an agreement.

Egypt's budget deficit is also ballooning: Finance officials said recently that this year's shortfall may top 10% of gross domestic product.

A central bank official said the new trading regime was meant to bring transparency to foreign-exchange trading. But analysts said the move likely was made as a last resort: Egypt's depleted foreign reserves are no longer adequate to prop up its currency.

The Egyptian pound reached a low of around 6.30 to the U.S. dollar on Sunday, hours after the central bank inaugurated a currency-trading plan that seemed to lighten constraints on the pound's managed float.

The bank also implemented limits on dollar-denominated transactions. Corporations will be allowed to withdraw only $30,000 in cash per day, while individual currency traders will be charged as much as a 2% administrative fee per transaction, in a move meant to discourage black-market dealing. Central bank officials declined to comment on the withdrawal limit.

The measures are the latest efforts by Egyptian policy makers to restore confidence in their management and to prevent a full-fledged devaluation of the currency, a move that would jack up commodity prices and threaten fresh unrest. In a note on Sunday, investment bank EFG-Hermes projected that the pound could slip to 6.60 to the dollar by the end of 2013.

Egyptian Prime Minister Hisham Qandil said Sunday that talks with the IMF would resume in mid-January. But Messrs. Morsi and Qandil could have difficulty persuading Egypt's opposition of a rationale to accept tough IMF austerity demands.

"By quarreling all the time, by disagreeing all the time, it's affecting the economic interests," said Alaa al Hadidi, Mr. Qandil's spokesman, of the secular-leaning protesters and their leaders. "We're saying if you want to continue fighting, OK, but let's agree on the economy."

Egypt's stock market remained relatively solid on Sunday, even as the central bank shed nearly $75 million in a bid to prop up the pound. Foreign and Egyptian investors seemed relatively unfazed by the run on U.S. dollars and the central bank's abrupt change in tack.

"I'm not sure if it's just panic or if it's an indication of the economy," Hisham Fahmy, executive director of the American Chamber of Commerce in Egypt, said of the central bank's move.

Meanwhile, Mr. Morsi's opponents are looking to use the battered economy to score political points against his Islamist government, which has struggled to retain economic talent.

Mr. Qandil on Sunday announced a "National Initiative for an Economic Start" that would enlist economic minds and opposition leaders to plot a rescue plan. "This country is not going bankrupt," he said. "There is a light at the end of the tunnel."

Leaders of the National Salvation Front, a leading opposition umbrella group, have so far rejected Mr. Morsi's calls for dialogue. Instead, they demand a kind of power-sharing deal.

"The point is that the government or the governing party alone, as we have seen until now is unable to lead the country in such an extremely dangerous situation," said Amr Moussa, a secular-leaning former presidential candidate and one of the NSF's leaders. "I'm not talking about a dialogue, I'm not talking about a meeting, I'm talking about a real coalition government."

Egyptian policy makers have defended the pound's value since a 2011 revolution thrust the country into instability and skewed its balance of payments.

Since then, Egypt's central bank has run through about $20 billion in foreign-currency reserves. By the end of November, Egypt held just $15.04 billion in U.S. dollars -- only slightly more than the three months of import cover the IMF recommends.

Egypt's troubled economy sparked concerns again last week, when rumors of a currency devaluation sent bank customers rushing to transfer their Egyptian pounds into U.S. dollars. On Sunday, many companies and individuals said dollars had nearly disappeared from the market.

Meanwhile, ratings firm Standard & Poor's Corp. last week docked Egypt's sovereign investment grade to single-B-minus from single-B, citing continued political strife.

(END) Dow Jones Newswires

31-12-12 0357GMT