Rise in Egypt's June Reserves Masks Serious Fiscal Problems

Egypt's net reserves may have edged up for a third consecutive month but a genuine recovery is still far off, analysts say, as one-time payments and revaluations mask the country's potentially chronic fiscal problems. The Central Bank of Egypt announced on Sunday that reserves had climbed a mild $13 million on the previous month, reaching $15.53 billion by the end of June.

This modest rise echoes previous, and slightly larger, increases in April and May which came after over a year of monthly falls in the wake of Egypt's January 2011 uprising. But despite the impression of an upturn, Cairo-based economists suggest Egypt's financial fundamentals remain deeply troubled, as imports continue to outstrip exports while tourism and foreign investment show few signs of a serious revival. Monette Doss of Prime Securities describes reserves growth as "stagnant", despite June support from roughly $500 million in treasury bill sales and the apparent receipt of $1 billion in long-awaited aid from Saudi Arabia.

Egypt saw around $2 billion of foreign currency outflows last month, she calculates, citing a high level of dollar-paid imports and significant investment commitments. Foreign currencies, which compose the bulk of the reserves, actually shed a net $500 million in June to reach $10.9 billion, according to figures from Beltone Financial. "We believe that the [reserves figure] in June 2012 reflects a weak performance of the balance of payments and continued pressure on the Egyptian pound during June 2012," the Cairo-based investment bank said in a Monday statement.

"In terms of the capital and financial account, portfolio investments have witnessed a net outflow ... with no significant FDI or aid inflows recorded during the month." The much-touted overall rise, according to both Doss and Beltone, was actually due to the upwards revaluation of Egypt's gold reserves at the end of the 2011/12 fiscal year, bringing them into line with higher global prices for the precious metal. The central bank's approximately 75.6 tonnes of gold holdings were recalculated at a new rate of $1,220 per ounce, equating to a rise in value from $2.7 billion in May to $3.3 billion at the end of June. The extra $600 million seems to have reversed what would have been a net montly loss into a mild gain. The coming months look challenging, too, as tensions build between Egypt's newly elected president and the military council, heralding the possibility of further disruptions to industry and tourism.

Doss says political uncertainty may also disrupt a long-discussed $3.2 billion loan from the International Monetary Fund, which the body says depends on a broad parliamentary consensus. Most local economists believe the loan vital to plug a widening gap in Egypt's 2012/13 government spending. Beltone Financial predicts the country's trade deficit will widen further, as exports fall on the back of slowing global demand and import bills rise due to a depreciated currency. The pound slipped 1 per cent against the dollar in June, and rumours of a forthcoming devaluation are rife.

Hany Genena, head of research at Pharos Securities Brokerage, says there is also the issue of settling liabilities to foreign oil companies. Egypt's government has racked up fresh debts in recent months by importing fuel in a bid to stem local shortages. "We don't know the payment schedules on these," he says, describing the difficulties of finding a true picture of reserve dynamics. "Sometimes one-off inflows, such as the Saudi $1 billion aid package in early June, are parked in public banks. This means we have to look at net foreign assets in the banking system, which are generally published with a lag of 3-4 months’’.

July's reserves figure, out in a month's time, is likely to show an addition $1 billion in funds from the Islamic Investment Bank, which Doss says will give some support. But she predicts ongoing disputes involving Egypt's parliament, its president and military are likely to further spook investors and exert more pressures on FDI. Other spending priorities, such as covering vital imports, may then make it difficult for the Central Bank to continue to prop up the Egyptian pound. "Currently, the foreign reserves cover three months of imports," she says. "Hence we perceive the threat of significant [currency] devaluation."