By Sujata Rao
LONDON, July 5 (Reuters) - Egypt's crumbling public finances
may be in even worse shape than previously estimated.
While stock and bond markets have cheered the ouster of
unpopular President Mohamed Mursi by the army and Egypt's debt
insurance costs have tumbled, data shows that financial risks
are about to escalate.
The central bank's net hard currency reserves, which a
country needs to pay for imports, are in negative territory if
upcoming short-term obligations are included, indicating a
looming funding crunch for Egypt unless it quickly accesses
The central bank has run through two-thirds of its cash
reserves in defending the Egyptian pound since early 2011
as foreign investment dried up and the economy reeled after the
uprising that toppled former ruler Hosni Mubarak. It has been
unable to replenish them other than with top-ups provided by aid
from Libya and Qatar.
Gross international reserves now stand at around $15
billion, barely covering three months of imports, but even that
figure is misleading, data shows. For one, it includes illiquid
assets such as gold, and second, upcoming contractual
obligations far exceed the amount of hard currency the bank
holds in its buffers.
According to data from the International Monetary Fund and
Bank of America/Merrill Lynch, reserves held in easily
convertible currencies are more than $5 billion in the red if
measured against the central bank's forward obligations.
The central bank's position turned negative last November
and has been steadily worsening ever since, the following
'When accounting for pre-determined and contingent
short-term drains, net currency reserves are effectively in
negative territory,' said Jean-Michel Saliba, Middle East
economist at BofA-Merrill in London.
Pre-determined and contingent drains as defined by the
International Monetary Fund include scheduled contractual
obligations in foreign currencies, foreign exchange guarantees
and commitments on swaps, options and futures contracts.
These stand at over $11 billion, IMF data shows, compared to
Egypt's existing gross currency reserves of around $6.5 billion.
'In the absence of fresh Arab aid infusion, Egypt has a
space of six months to calendar year-end before the external
position tightens markedly again and the sustainability of the
current FX arrangement comes under severe strain,' Saliba said.
Estimates of Egypt's financing needs vary. Saliba reckons on
$33 billion over the coming 18 months, including $14.7 billion
by end-2013 while analysts at VTB Capital estimate external
funding needs of $19.5 billion in the year through June 2014.
The central bank has been rationing hard currency access via
a system of auctions but the pound is at a record low beyond 7
per dollar and forward markets are betting the authorities
will not be able to hold the line much longer, pricing a roughly
20 percent depreciation in the coming year.
On the bright side for Egypt, a significant portion of these
obligations consist of maturing dollar-denominated T-bills,
which are mostly held by local banks and should be easy to roll
over. These amount to around $5 billion by end-2013, analysts
Souheir Asba, emerging markets strategist at Societe
Generale, noted that a recent T-bill auction had seen healthy
'The market is being over-optimistic about Egypt but they
won't default. They will get a lot of external help if they
request it,' she said.
It is also possible for central banks to run negative
positions for a period - the South African Reserve Bank for
instance ran net negative reserves for years, hitting a deficit
of almost $30 billion in 1994.
Egypt's increasingly pressing funding crunch, however,
suggests Cairo will be left with little option but to secure a
$4.8 billion IMF loan deal - something its post-revolution
governments have been trying to avoid, fearing that subsidy cuts
demanded by the lender could fuel further social unrest.
(Graphic by Vincent Flasseur; Editing by Susan Fenton)
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