Egypt’s banks will open today for the first time in more than a week amid investor concern that a possible run on deposits may weaken the currency and raise government borrowing costs. Yields on Egypt’s treasury bills may surge about a third, said Shahinaz Foda, head of treasury at BNP Paribas Egypt. The country plans to auction 11 billion Egyptian pounds ($1.9 billion) this week in T-bills. Credit Agricole CIB expects the pound to slump 20 percent in the short term. The currency’s three-month non-deliverable forwards rose to a record last week as protesters seeking the resignation of the president clashed with his supporters.
The central bank, which has $36 billion in reserves and guarantees bank deposits in the North African country, said last week lenders had enough liquidity to meet all demands. The central bank on its website listed more than 200 banks that will open today.
“Banks are indeed liquid, but bank runs are not always rational,” Ann Wyman, London-based head of emerging markets research at Nomura Holding Inc., said in an e-mail Feb. 3. “The central bank took a good step in saying something publicly to try to reassure depositors.”
T-Bill Yields
The finance ministry plans to hold a meeting with the central bank and primary dealers and will issue a statement later today, Hani Khallaf, the finance minister’s public debt adviser said in a telephone interview last week. Egypt’s stock exchange will “likely” open this week with new rules to limit the expected drop in the market, communications manager Hisham Turk said yesterday. The bourse has been shut during the past five working days.
Treasury bills with maturities ranging from 91 days to one year are scheduled for sale this week, according to the website of the finance ministry. It postponed the sale of 4 billion pounds planned for Jan. 30 after raising 2.5 billion pounds on Jan. 27. The average yields on the sale of 182-day bills jumped 40 basis points to a one-year high of 10.6 percent, according to data compiled by Bloomberg.
Yields on three-month treasury bills should be “not less than” 12.5 percent in upcoming auctions, up from 9.5 percent last month, Cairo-based Foda said by phone yesterday. The yield on the one-year bills may climb to 14 percent from 10.6 percent, she said.
Egypt’s central bank will hold an auction for treasury bills tomorrow and announce the result the next day, Deputy Governor Hisham Ramez said yesterday.
Public Spending
In an attempt to placate the protesters, newly appointed Finance Minister Samir Radwan reiterated yesterday that the government won’t reduce subsidies even if global prices of food and commodities rise. Public spending will be used as a tool to “achieve social justice,” he told a news conference in Cairo.
An increase in public spending may push the budget gap to “double digits” in 2011, compared with 8.1 percent in the fiscal year that ended in June, rating company Standard & Poor’s said last week after lowering the country’s credit ratings a notch to two levels below investment grades. Fitch Ratings and Moody’s Investor Service also cut Egypt’s ratings.
The unrest sent the yield on the country’s 5.75 percent bond due in April 2020 to a record 7.2 percent on Jan. 31. The yield has dropped 62 basis points since and ended the week at 6.59 percent. The cost of insuring Egypt’s debt for five years with credit-default swaps soared to 430 basis points on Jan. 28, the highest since April 2009. They closed at 380 on Feb. 4, CMA prices in London show.
Not Defaulting
Radwan said Egypt will honor its debt obligations and urged foreign investors to have confidence in the country. “All the bond obligations, everything will be honored on time,” Radwan said in a Feb. 4 telephone interview from Cairo. “We are not defaulting on any obligations.”
Banks held 937 billion Egyptian pounds in deposits in November, according to preliminary data published on the central bank’s website. Of that, households held 505 billion pounds, while private companies held 124 billion, the data show. The country’s banks have an average loan-to-deposit ratio of about 53 percent, Mohamed Barakat, head of the banking association, said in an interview on Jan. 30.
Some Egyptians, such as 32-year-old pharmacist Moustafa Awwad, said they won’t rush to take their money out.
“I have enough cash and the central bank guarantees all deposits,” he said in a telephone interview from Cairo. “Having money at the bank is safer than holding cash.”
Pound Forwards
Egypt’s three-month non-deliverable pound forwards strengthened 0.2 percent to 6.325 per dollar on Feb. 4 from 6.34 the previous day, according to data compiled by Bloomberg. The contracts reflect bets the currency will weaken 7.4 percent in three months from the spot rate of 5.8570. A drop in the Egyptian pound may prompt the central bank to intervene, John Sfakianakis, chief economist at Banque Saudi Fransi Credit Agricole Group, said in a note Feb. 3.
“Over the short term we expect the Egyptian pound to fall by 20 percent, which would require the central bank to intervene on several occasions,” he wrote. “The drawdown in reserves would be a crucial factor in supporting the Egyptian pound, but increased political tensions, a run on local banks as well as expected dollarization of some of the deposits will impact the short-term currency outlook.”
Protests demanding the ouster of the president erupted Jan. 25 and have left at least 300 people dead according to United Nations estimates. A total of about 1,200 people were wounded, Health Minister Ahmed Farid said yesterday in an interview with State TV. Egyptian authorities and opposition leaders yesterday began talks on ending President Hosni Mubarak’s 30 years in power before September elections.
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