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Category Archives: Currencies

Egypt left vulnerable after Qatari snub

It was bound to happen sooner or later.

Egypt has returned to Qatar the $2 billion the Gulf state deposited in Egypt’s central bank after negotiations to convert the money into three-year bonds failed.

Though this represents only a quarter of the total funds Qatar has lent or given to Egypt, the decision to return the money symbolises the increasingly strained ties between Cairo and Doha following the ouster of Islamist president Mohammed Morsi in July.

Qatar had been a strong supporter of the Muslim Brotherhood’s Morsi and his departure raised questions of whether Egypt would have to repay any of the total $8 billion in Qatar deposits and loans. Official reports suggest Egypt couldn’t reach a deal with Qatar and decided to repay the deposit rather than convert the $2 billion into bonds.

But in reality, perhaps Qatar was asking for a higher interest rate than Egypt was prepared to pay. Or maybe Qatar simply wanted its money back.

Either way, Egypt has been left in a vulnerable position.

Despite the $12 billion in support from Saudi Arabia, Kuwait and the United Arab Emirates that the government keeps boasting about, the breakdown of this bond deal shows that Egypt cannot rely on the Gulf to solve its problems.

The truth is that multi billion dollar support came because the Brotherhood were eradicated from the political scene, not because Gulf states are particularly bothered about seeing an economic recovery. But here’s the dilemma: the international community have openly stated they want an “inclusive political solution” that does not abandon the Islamists.

So how will Egypt reconcile the needs of international donors (such as the International Monetary Fund, African Development Bank and World Bank who can help implement essential reforms but need the Muslim Brotherhood on board), along with requirements of the Gulf states (who have provided a helpful but unsustainable safety net)?

Egypt has so far taken the easy road by refusing to make any real budget cuts and instead announced an unrealistic stimulus package that it can’t afford.

The Qatari deal breaker signals that the government is weak and its backers are dwindling. Now is the time for Egypt to reconsider how to make the most of the Gulf while the support lasts.



The Wrap: Egypt Wheat Stocks Politicised, Libya Allies Gather To Plug Oil Gap

  • EGYPT 

- Unemployment: Arab Spring Not Springing BackNPR 

An interesting podcast from NPR on the problem of unemployment in the Arab Spring, particularly among young Arabs.

The Wall Street Journal economics reporter Sudeep Reddy and Shadi Hamid, director of research at the Brookings Doha Center, discuss why jobless rates are so high in the Arab world, particularly in Tunisia and Egypt, and why political will is so crucial to alleviating unemployment pressures.

I’ve written extensively on this topic and the reasons why Arab youth can’t (and sometimes won’t) find employment. 

- Wheat stocks sufficient until February: Supply MinisterDaily News Egypt 

Another never ending conundrum for Egypt is how to keep up with demand for wheat, especially as dwindling foreign reserves and a falling currency has made imports more costly.

It’s also a topic that is highly politicised. In an attempt to put any concerns about supply to rest, Egypt’s supply minister, Mohamed Abu Shadi, has insisted that the country has enough wheat stocks to last until midway through February 2014. 

The country was forced to import 80,000 tons of wheat to make up for shortages that the interim government say were exacerbated during Mohammed Morsi’s tenure, Abu Shadi said. At the time of Morsi’s ouster, interim officials blamed the Islamist president for mismanaging wheat imports and stopping supplies.

(In reality, Egypt has a long history of addiction to bread subsidies, and one year under Morsi wasn’t going to make the situation much worse than it already was).

Yet, despite the government’s confidence, Egypt is said to still be looking to receive offers of French, Russian, Ukrainian wheatBloomberg has reported.

- Ezz Steel Jumps as Egypt Mulls Punishing Turkish Steel - Bloomberg 

Did you ever expect, in the “New” Egypt, for a senior official in Mubarak’s National Democratic Party to be acquitted of financial crimes after very little investigation? Ahmed Ezz, steel tycoon and head of the Ezz Steel company, was in June acquitted after being charged with monopolising the country’s steel market.

Despite his conflict of interest, and his dodgy links to the old guard, Ezz is back to business and being protected by the interim government. Egyptian officials are considering taking actions against an increase in Turkish imports at low prices to protect local industry. By local industry, I mean Ezz Steel.

Shares in the steel company rose the most in two months and no doubt company officials are delighted.

- A new gas producer in Egypt - Daily News Egypt 

At a time of uncertainty, it is reassuring to find a new company willing to enter the oil and gas industry.

RWE Dea, an international oil and gas company headquartered in Germany, will launch gas production in Egypt, Daily News Egypt reported. The project includes the development of seven gas fields in the Egyptian Nile Delta.

  • LIBYA 

- Saudi, US, Iraq step in to plug Libya oil gap - Wall Street Journal 

Countries around the globe are gathering to protect the oil price at any cost. The WSJ reports:

Saudi Arabia has been pumping oil at its highest level in decades to offset a global shortfall fueled by another hot spot besides Syria: Libya, where unrest has slashed output.

A tumble in Libyan production to depths not seen since a civil war toppled the Gadhafi regime in 2011, combined with fears of a possible U.S.-led military strike against Syria, have sent oil prices sharply higher in recent weeks.

To counter this, soaring Saudi Arabian, US and Iraqi output is helping cushion the blow, OPEC has said. Libya, which holds Africa’s largest oil reserves, has suffered from strikes by armed guards, shutting down most of the country’s terminals.

Output fell to a post-revolution low of 150,000 barrels a day last week.

But while Saudi Arabia is pumping the highest level of oil into the market for decades to offset a global shortfall, the Kingdom is consuming more of its own oil every year and a reliance on costly energy subsidies is making it’s budget more vulnerable.

Still, that niggling worry is not enough for Saudi officials to reduce output, so for now Libya will see its allies rally around it.

- Security update Libya Business news 

For those interested in the minutiae of Libya’s security situation, Libya Business News has a useful weekly update and map of incidents highlighting risk:

Libya Business News
Libya Business News


The Wrap: Egypt Labour Disputes Threaten Recovery, Syria Tries to Close Import Gap

  • EGYPT

- This morning the government statistics agency, CAPMAS, published figures that show annual consumer inflation slowed to 9.7% in August, from 10.3% in July reflecting easing pressure on the currency. The pound has actually been appreciating slowly in the last month but as Rebel Economy has signalled before, that doesn’t mean the currency is strong.

BG Group Drops Most in 10 months on Egypt Delays - Bloomberg 

Remember that good news yesterday on BP’s gas discovery in Egypt? Well news that another British oil company, BG Group, is suffering project delays in Egypt shows how fragile the country’s energy sector can be.

Here’s an excerpt from the Bloomberg story covering BG’s announcement:

BG Group Plc fell the most in 10 months in London trading after saying project delays in Egypt [and Norway, but cut that bit out here] will curb oil and natural-gas output next year.

The company was the worst performer on the FTSE 100 Index. Political turmoil in Egypt has forced BG to delay its West Delta Deep Marine project, it said today in a statement.

Though this is bad news for BG’s stock, it’s even worse for Egypt which relies on the oil and gas sector as one of the backbones of the economy. The last two and half years have seen Egypt’s debts to oil companies mushroom partly because of costly energy subsidies putting a burden on the government’s finances, and partly because of increased reliance on imports, that has depleted foreign reserves.

That has put many big oil investors in a quandary over whether to continue pouring money into Egypt. Apache, on the of the largest foreign investors in Egypt, has already agreed to sell a 33% interest in its Egypt operations

Dismissed trade union members threaten to file complaint with ILO - Egypt Independent 

Meanwhile, discontent is brewing in Egypt’s labour sector, where the new manpower minister Kamal Abu Eita has kicked up a storm by firing members of the Egyptian Federation of Trade Unions, including its head Gebali El-Maraghi.

Media reports suggest the dismissals happened because some members were part of the Muslim Brotherhood and continued to support the former Islamist president Mohammed Morsi. Others say a new amendment to a law meant the board had to be dissolved.

What is clear is that these internal tussles do not bode well for the labour movement, which is a critical element of a transitioning Egypt. 

Qatar agrees to convert $2 billion into Egypt bonds: ReportsAhram Online 

In a sign that Qatar will continue to support Egypt, it has agreed to convert another $2 billion into Egypt bonds, after converting $1 billion into three-year bonds in July, and $2.5 billion into 18-month bonds in May.

The bond purchase is one way of supporting Egypt’s widening budget deficit, which is close to 14% of GDP. With Qatar a strong supporter of the Brotherhood, it looked like it may withdraw aid after the ouster of Morsi, however, it also has close to $8 billion invested in Egypt, and that doesn’t include several corporate deals worth much more. In June of last year, Qatar agreed to back Citadel Capital’s subsidiary, Egyptian Refinery Company in a deal worth $3.7 billion.

  • LIBYA 

- OMV “Halts Libyan Flows” Libya Business News 

Protests in Libya have reportedly forced Austrian oil company, OMV to halt production. A company spokesman told Reuters:

OMV’s production in Libya, which was largely unaffected by the events of the last few weeks, has now been shut in as events have spread to the west of the country … OMV is closely monitoring the situation.

It is estimated that protests has led to a 30% decline in oil production, which is massive for a country that is so reliant on its oil. The government has been forced to import fuel to keep power stations running while queues grow at petrol stations.

Protestors are asking for more pay and calling for greater regional autonomy, which is difficult considering the government’s monopoly over oil.

But there could be some solution at a hearing this week…

Libya Congress to hear proposals on oil deadlockReuters 

The crisis committee tasked with resolving Libya’s oil paralysis will brief the 200-member General National Congress by Wednesday with proposals on how to end the confrontation, Reuters reports.

A solution to the stalemate between the government and tribal mediators is becoming more critical. Last week, Libya’s oil output hit a post-war low of just 150,000 barrels per day compared to its capacity of 1.6 million bpd. 

  • SYRIA 

- Syrian pound depreciates as talk of US strike growsSyria Observer 

Unsurprisingly, this story, translated from Syria’s economic magazine, Iqtissad, indicates that traders expect a “dramatic rise of the US dollar against the pound if the US Congress votes  ‘yes’ to military action”.

With indications from Obama this morning that the US could pause any plans for attack on Syria, the pound could see some short-term respite.

A black market dealer said the Dollar could be worth as much as 350 Syrian pounds if Congress agreed to strike. But even without a strike, inflation is still plaguing Syrians who are now spending four times as much on staple goods. Syria’s official inflation rate has continued to increase though it still remains below unofficial estimates.

- Syria looks to buy 135 thousand tons of rice after August tender closed without a deal Syria News 

Syria’s Foreign Trade Organisation has opened another tender for rice as it struggles to keep up with demand. Sanctions and soaring inflation has hit the country’s economy. 

It needs at least 140,000 tons of rice a year to cover demand, according to the report.

Even as this report came out, Jordan announced that it would cancel agricultural imports to Syria due to the escalating violence.

Radi Tawarneh, Secretary General of the Jordanian Ministry of Agriculture, said Jordan had already made significant losses in its agricultural sector as a result of the Syrian crisis in the range of 80 million Jordanian dinars.

This will deprive Syria of about 180 thousand tons of fruit and vegetables, according to the report. 



The Wrap: Morsi Wealth Investigated, Libya Public Sector Wages Up 20%

  • EGYPT 

Egyptian authorities examine Morsi family wealth - Ahram Online 

The ousted Islamist president is accused of taking advantage of his position, as well as squandering LE2 billion ($285.7 million) during his election campaign. Egypt’s Illicit Gains Authority, the organisation that has thus far failed to follow through on most of its investigations against Mubarak-era politicians and businessmen, is among the entities leading the investigation.

Unfortunately, the IGA along with Public Funds investigator and the half a dozen or so other “investigation committees” have demonstrated that they are driven more by politics rather than a genuine desire to crackdown on illegal transactions and wipe out corruption. Many former officials of the old guard linked to corrupt dealings have got away with dismissals, retrials and prolonged case hearings.

This investigation will probably cost as much as Morsi is thought to be worth. Even so, it is small fry compared to the billions of dollars lost in Egypt’s deep web of corruption. 

BP Egypt announces new gas finding in North Damietta - Egypt Independent 

Finding gas is different to developing it. At the moment, it is costing energy companies more to retrieve oil and gas because the oil ministry is behind on payments to companies like BP.

It’s possible that even if this gas was developed, BP would sell it off to a third party, depriving Egypt of much-needed gas. 

Global Competitiveness Ranking 2013-14 - Egypt comes 115th - World Bank 

It’s no surprise Egypt is among the least competitive countries in the world considering the difficulty in doing business right now (and it was difficult before the revolution!).

Egypt’s competitiveness ranking was worse than Ghana, Bangladesh and Nepal, but it managed to squeeze past Yemen and Pakistan, which isn’t saying much.

But it’s not all bad news….

Is Egypt at risk to a freeze in capital inflows? - Economist 

This useful Economist chart linked to above shows that Egypt is, quite remarkably, not among those emerging markets most at risk of a sudden freeze in capital inflows, unlike Turkey (at Number 1 risk) and Brazil.

That’s probably because foreign direct investment to Egypt has been low for some time, and because of billions of dollars of Gulf funding that has somewhat kept the current account deficit at the same level. Plus Egypt’s external debt hasn’t skyrocketed as much as expected (again due to “gifts” from the Gulf and favourable loan terms), meaning the risk of default is lower.

  • LIBYA 

Public sector wages to rise 20% - Libya Herald 

This is part of the Libyan government’s plan to remove the subsidies on commodities, so that individuals can afford higher prices for fuel. But it’s also an attempt to crackdown on employees with multiple salaries in public sector positions.

Now that may look positive at the outset, but ultimately, spending more on salaries to cut salaries doesn’t make much sense. In a way, this is really a way to appease citizens, at a time of a lot of strikes, by handing out more cash. But, as we have seen in other Arab countries going through transition, people will not settle for money until long-term problems are solved.

The government should for instance focus on diversifying the economy and creating jobs away from oil.



The Wrap: Cairo Bomb Shows Stability Elusive, Libya Oil Production Down 30%

  • EGYPT 

Egypt’s Brotherhood under legal threat as bomb hits central Cairo - Reuters 

Nothing has damaged Egypt’s economy more than the threat to security and stability. The perception of risk is enough to derail an entire economy and it will continue to keep investors away. The killings of hundreds of innocent civilians in a bloody crackdown a few weeks ago only compounded this perception and made it reality.

The fear that a jihadist and extremist element may have been borne out of the military coup is materialising. An attack on a police station in central Cairo and plans for new mass protests by the Brotherhood on Tuesday shows how elusive stability is.

Though a state of emergency and a curfew has to some extent successfully shrunk the number and intensity of protests, the interim government has yet to show that it is in control (and not the army).

Egypt boosts Suez security as foiled attack shows risksBloomberg

Security problems this week at the Suez Canal the waterway which handles about 8% of world trade, is among the only areas in Egypt that highlights just how damaging the new threats that are emerging after Islamist president Mohammed Morsi’s ouster.  

Half our petroleum products are gifts from Arab countries, says authority –  Egypt Independent 

This would be funny if it wasn’t so damaging for Egypt’s deficit and the wider economy. The head of the state oil company, the Egyptian General Petroleum Corporation, admitted that 50% of the petroleum products that the authority needs to import come in the form of gifts from Arab countries as part of the aid they provide to help the Egyptian economy.

I’ve said it before and will say it again: Rather than depend on the GCC for plugging a gap that will always reappear, Egypt should try to renegotiate real investment from these countries and seek technical expertise on how to restructure energy subsidies. The welfare on energy is the biggest drain on the budget and will continue to be so until the price of fuel is raised for those who can afford it.

Speaking of which:

UAE to shower Egypt with additional $2 billionAhram Online 

  • SYRIA 

Syrian government backtracks on plans to charge customers for plastic bags for bread- Syria News (Arabic)

Probably wise considering Syrians are struggling to buy bread in the first place. The government was going to charge consumers 4 Syrian pounds a bag after bakeries and manufacturing plants financial losses mounted.

The price of most products has increased as the currency depreciates against the dollar.

Tenders for food commodities fail to draw interestReuters 

Syria has cancelled two tenders for food commodities in recent weeksReuters has reported, threatening food supplies to the population.

  • LIBYA 

Libya imports fuel to keep power onWorld Bulletin 

Libya has begun importing diesel and fuel oil to keep power plants operating after protests closed most of the gas fields in its eastern region which usually supply them, the World Bulletin reports.

Analysts told me last week that protests around oil fields have caused a 30% drop in production this year, a massive amount for a country that owes its post-revolution revival on oil.

In the meantime:

Libya and Malta agree oil deal, will collaborate on explorationLibya Herald 

Under the agreement, Libya will supply energy products to Malta at preferential rates. That will include crude and refined oil, jet fuel and LPG, the Libya Herald reports. In return, Malta will be aid Libya in transport and civil aviation.

However, the agreement won’t be in place until Libya resumes normal production. Considering the country is struggling with its own oil exports and supply (Oil exports are down to 160,000 barrels a day), this doesn’t seem like it will happen for some time.

And another critical part of the arrangement is for Libyan oil and gas workers to learn English in Malta.



Economic Impact of US Intervention in Syria

As the world awaits the decision of whether the US will intervene in Syria’s bloody civil war, the price that country is paying is growing day by day.

Hundreds of thousands of people have been slaughtered and cities that were once cultural capitals have been annihilated. Inflation is at triple digits, GDP has literally halved and the jobless rate has quintupled.

But the key question today, and the one that President Barack Obama has brought to US Congress, is whether military-led intervention will serve as an overdue punishment and warning to Bashar Al Assad and his regime, or whether it will simply deal a final blow to the country as the Syrian regime’s allies retaliate aggressively at the expense of innocent civilians.

While it is the humanitarian cost that is the number one consideration here, the economy, even in its current state, is still a lifeline for thousands of Syrians. The global economic impact of an escalation of the civil war is also a factor that is being mulled because of the ripple effect on global markets.

Based on interviews with half a dozen senior economists focused on Syria, Rebel Economy has put together a list of the key economic impacts of US military-led intervention in Syria:

Higher Oil Prices

Although Syria is not a major oil producer, many expect the oil price to spike, mainly because Western intervention in Syria is likely to lead to a bigger regional conflict involving major oil producers and two strong allies to the Assad regime, Iran and Russia.

More than two years into Syria’s civil war, Assad is settling his bills for Russian arms orders to try to shore up ties with his most powerful ally, this Reuters investigation reveals.

Oil prices have already hit an 18-month high, but if the civil war escalates with military strikes the oil price is expected to spike further, playing havoc with global markets as the cost of production soars.

Some oil analysts are estimating that Brent Crude could rise above $120 per barrel as a result of a military strike, while some, including those at Société Générale, see prices climbing to $150 per barrel in the short-term.

A possible spillover into Iraq, OPEC’s second largest producer, would cut the volume of oil from the global market and raise prices. Iraq’s Kirkuk oil pipeline has already been targeted six times in August. This has forced Iraq to cut oil shipments from pipeline by more than half for September.

Foreign Currency Troubles

Pressure on foreign reserves will grow as energy prices rise, especially in countries dependant on imports. Some countries near to Syria are particularly vulnerable to foreign currency pressures, including Lebanon and Jordan whose currency reserves stand at near 10-year lows. This means they could have trouble covering the cost of imports if the conflict in Syria escalates.

And the lower reserves fall, the more currency depreciation is possible and the more pressure on imports.

In Syria, in the days following the US’ announcement of possible military intervention, the Syrian pound has taken a beating on the black market.

Here’s Professor Steve Hanke’s update. He’s a professor of Applied Economics at Johns Hopkins University:

The Syrian pound (SYP) has lost 24.07% of its value against the US dollar in the two days since Kerry’s announcement. Currently, the exchange rate sits at 270 SYP/USD, yielding an implied annual inflation rate of 291.88%. In countries with troubled currencies, there is no better measure of economic expectations than the black-market exchange rate. The recent deterioration in the SYP/USD exchange rate clearly indicates that Syrians are anticipating Western military intervention in the near term.

Trade Routes Disrupted

Analysts say it’s unlikely for key ports in the Gulf or cargo traffic through the Suez Canal to be disrupted as a result of military intervention, however perception is king.

Even the threat of increased disruption could send insurance rates skyrocketing and delay the passage of goods passing through Lebanon’s Port of Beirut.

Contagion effect

Aside from the impact on the oil markets and the major oil producers tied to Syria, many other countries in the region could see an adverse impact on their economies because of Syrian strife. Turkey for example, already suffering from a hard to manage current account deficit, could see it widen as political instability weakens the lira and raises oil prices.

And of course Israel has threatened aggressive action if attacked by Hezbollah or the Syrian army, which could impact both Lebanon and other countries in the region if the conflict escalated fast.

Overstating the impact?  

Despite all the above pointing to an Armageddon scenario, some still say that an intervention will do no more than dent the Syrian regime.

Samer Abboud, a visiting scholar at the Carnegie Middle East Center and political economist, says the “regime is so boxed in economically and any major economic effects have already occurred – sanctions, the disrupting of production and trade routes, and so on – that the “limited and narrow” strikes will not be as debilitating as we may think”.

For one, though we mentioned above the impact of trade routes, in fact local reports from Lebanon suggest the Port of Beirut is doing much better than expected. The Daily Star reports:

About 2,200 such vehicles enter the port daily, twice the number at the start of the year, and the multicolored containers are stacked five high rather than three. While Lebanon’s growth has suffered during the two-and-a-half-year conflict next door in Syria, port traffic has risen as traders avoid risky overland transit. Domestic demand is also increasing as Lebanon absorbs 1.2 million Syrians fleeing their war-torn country.

Unlike Libya, which had little to no foreign support, Syria has the powers of Iran and Russia behind it arming it and financing the regime. The West’s reluctance and delay to intervene is also ultimately buying more time for the Syrian regime to replenish stocks, move somewhere new and high military assets.

It has also weakened the West against Syria, allowing the regime and its allies to calculate that any intervention will be short and not a major long-term threat, according to Abboud:

Regime allies are unlikely to cease financial and material support in the aftermath of intervention, regardless of whether the regime is perceived to be losing ground on the battlefield. Intervention will only strengthen the commitment and resolve of regime allies and supporters, particularly Iran and Hezbollah. If they can withstand the intervention, then the West’s only major military option will have been confronted.

What is clear is that even though the question of intervention is complicated and mired with complexities, the longer the West waits to decide, the more time the Syrian regime has to retaliate with strength.



The Wrap

After several months hiatus (and readers saying they are having sleepless nights without it) the daily wrap is back!

I’ll be linking to a handful of the most important economic stories from the transitioning countries of the Arab world, namely Egypt, Syria and Libya, and to a lesser extent Tunisia, Yemen, Jordan and Morocco. (The Gulf is there in the background too, but only because of its connections to these countries).

1) Energy groups rethink commitment to Egypt - Financial Times

This story has become evergreen for Egypt and it seems like every couple of months a new story crops up to remind us that debts to oil companies are not going to disappear anytime soon.

The story repeats much of what has already been reported, mentioning companies owed millions of dollars including BG group, ENI and the Dana Gas. However the premise of the story may be unfounded. Although oil companies may be acting cautiously at the moment, and holding off any expansion plans, it’s very unlikely that these companies will pull out of Egypt altogether. Not only would this prove costly for these companies to pull out their equipment and human resources, but those firms would miss out on costs they are making at the moment. Because, as the FT story says:

Egypt’s oil and gasfields continued to produce as if nothing had happened.

2) Egyptian cabinet approves $3.2 billion economic stimulus plan - Reuters

Reading this story made my blood boil.

The government has already introduced some stimulus measures including lowering interest rates (and more controversially printing money, though that’s more rumour than fact). But increasing spending at a time when the budget is reeling from over-expenditure on wasteful subsidies (for both energy and food) masks a difficult truth: the government doesn’t actually want to make any cuts, or raise taxes to keep its own reputation in tact and avoid any public backlash. Essentially, it’s a cowardly move that will mostly benefit the current interim government who has so far been completely ineffective after the killings of hundreds of Egyptians.

And that perception that $12 billion of Gulf money will save Egypt is very naive. That money is not being targeted at the budget. At best it may be used for some investments, but really it will be used to keep the pound afloat and the country’s imports flowing.

Capital Economics, the London-based consultancy elaborates. This is their bottom line:

Egypt’s newly-announced stimulus package stands a chance of boosting the beleaguered economy in the near-term. But with the package being funded by Gulf aid, over the longer-term, it could actually take the country further away from making much-needed reforms to improve the business environment. 

3) Energy stocks rise over SyriaReuters

I will be writing on the economic impacts of US intervention in Syria later but for now, there are some gems hidden in this stock market story. Capital markets have been responding wildly to this. Gulf stock markets suffered record losses. Though it’s not clear that any escalation of the Syrian civil war would have a pronounced effect on Gulf economies, these same countries have been supporting Syrian rebels for some time.

As a result, investor rushed to the safest commodity around (well it was safe until a few months ago when the gold price plunged…). Gold prices rose to three and a half month highs above $1,430 per ounce as Syria tensions raised its appeal as a safe-haven asset.

 



Why Egypt’s Pound Isn’t Strengthening

Take a look at this chart, which the Central Bank has been proudly parading this month:

Bloomberg
Bloomberg

It shows how the pound’s official price, controlled by the central bank, has been appreciating slowly since the overthrow of Islamist president Mohammed Morsi. 

If we were to take this graph at face value, we might conclude that the pound has strengthened as the interim government (and military) took over, and billions of dollars worth of Gulf aid is helping the country’s currency stabilise.

However, traders on the black market tell a very different story, and say the Central Bank is ensuring the pound strengthens just to give the impression that the economy is stable and improving despite the turmoil.

Here, where the pound is traded illegally, the domestic currency has actually weakened to LE7.20 (from LE7.10 a few days earlier, according to Reuters) reflecting Egypt’s volatile economic and political situation.

The pound actually fell as low as around LE8 per dollar at one point earlier this year on the black market, prompting the central bank to turn to a few different measures to reduce pressure on the currency and revive the economy:

  • It put the currency up for sale a few times in December 2012 to prevent a currency crisis and let the pound lose more than 11% of its value on the official market
  • It cut interest rates for the first time since 2009 to revive economic growth
  • The government accepted $12 billion of Gulf aid from Saudi Arabia, Kuwait and Abu Dhabi. $5 billion of that has already arrived.

But none of that is working. This graph puts the currency’s performance in context, showing how the pound has rapidly fallen in value this year:

currency3

And as the pound depreciates further, the more foreign currency reserves are drained and the less the central bank can support the official rate for the currency. This is why the country is spending foreign currency at a rate of about $1.5 billion a month.

Add to that, the few foreign investors left are moving to withdrawals but currency controls are making it difficult to convert Egyptian pounds to dollars. Earlier this month, Emad Mostaque, a strategist at Noah Capital Markets in London told me around half a billion dollars worth of investment is trying to leave Egypt at the moment. 

So the picture isn’t as rosy as the interim government may want you to think.

In fact, the volatility we see on Egypt’s currency cycle will be another black mark to add to the nation’s problematic currency history, marked by the Central Bank’s repeated efforts to keep the pound’s value elevated, sometimes at the expense of the country’s precious foreign reserves.

The people at Dcode, an Egyptian business consultancy, put together a comprehensive graph detailing just how volatile the Egyptian pound has fared in the last three decades:

Dcode
Dcode

As long as the central bank and government refuse to accept that massive political turmoil and violence on the streets alarmed investors and traders, the pound will continue to fall, foreign reserves will bleed faster and the Gulf will have even more power over Cairo as it comes to the rescue once more with billions of cash. 



Syria’s Troubled Currency

Syrian state TV this morning broadcast images of a nervous-looking Bashar al-Assad as he prayed alongside Syria’s grand mufti to mark the start of Eid al-Fitr, the holiday that ends the holy month of Ramadan.

Though this is Assad’s third public appearance in just over a week as the regime tries to capitalise on recent gains against rebels fighting to oust him from power, the president’s eyes, darting back and forth, told a different story.

The reality is that Syria’s economy is deteriorating fast and there is little the regime can do to stop it.

As Anne Barnard, the New York Times’ Beirut bureau chief summarised:

Two years of war have quintupled unemployment, reduced the Syrian currency to one-sixth of its prewar value, cost the public sector $15 billion in losses and damage to public buildings, slashed personal savings, and shrunk the economy 35%.

And desperate times call for desperate measures. The government is now implementing measures to try to slow the rate of economic deterioration. It banned food exports, launched a crackdown on black market traders and measures to tighten state control of the economy.

Earlier this week, the government also forbid the use of foreign currencies for any type of commercial transaction or settlement. Anyone found violating the decree could face anywhere from three to 10 years in jail, with hard labour, depending on the level of the “crime”.

It’s no surprise that the regime is putting in place stricter measures to stem the volatility of the exchange rate. After all, the Syrian pound now changes hands at around 200 pounds to the dollar in the black market, from just 47 pounds before the conflict erupted in March 2011.

But there’s a more sinister impact of these harsh rules. Economists say the stiff penalties are a throw back to a more draconian era where economic courts handed out harsh sentences and loomed heavy over Syrian businesspeople. 

Ironically this was phased out as Bashar al-Assad moved in favour of a more economically liberal approach.

But as the country now moves to rein in some of the modest economic liberalisation and support for private business that the president introduced early on in his tenure, the prospect of more state control and less economic freedom is real.

Still, despite the fact reserves are perceived to be close to zero, sanctions against the government, a depreciating currency and a growing black market, Syria has still managed to avoid hyperinflation by relying on credit from its allies (namely Iran and Russia). 

For a country to experience hyperinflation, it has to have monthly inflation rates of 50% or more. Syria’s rates are more in the region of 10% to 14%, according to Steve H. Hanke, a professor of applied economics at Johns Hopkins University and one of the only economists investigating Syria’s economy.

Annual inflation is estimated to be running at about 200%, Prof. Hanke told Rebel Economy, with most food prices now tripled, but that still doesn’t mean total collapse:

My experience with situations like this, for example in the former Yugoslavia in 1991 [where Prof. Hanke was an advisor to the government], is that it really can take some time for an economy to collapse.

Even in the case of Yugoslavia it took quite a number of years before Milosevic’s regime actually collapsed. But then they had the third highest hyperinflation in history in January 1994, and in one month registered a rate of 313 million%.

It’s much, much higher than anything they’re experiencing in Syria.

But that’s not to downplay Syria’s economic situation.

This table, from Prof. Hanke’s “Troubled Currencies” project, shows the level that Syria’s annual inflation rate has reached compared to other countries with currency pressures:

As people’s purchasing power is eroded and the Syrian pound loses value, the economic impact of the civil war will become painfully clear.

Syrians, knowing the country is on the brink of hyperinflation, will be forced to depend on increasingly informal methods of payment, more akin to bartering than to a financial transaction.

Even though Iran announced a $3.6 billion credit line to the Syrian government earlier this month that could help with fuel and other products, there is no guarantee that this deal will materialise. The prospect of hyperinflation, and the subsequent additional trauma on civilians, is nearing.

 



Patriotic Egyptians Donate to National Fund

For Egypt’s Central Bank, financial donors are always welcome.

Whether it’s Qatar, Saudi Arabia or even controversial international lenders like the International Monetary Fund, if the donation looks and feels like US dollars, Egypt is happy to receive it. Especially at a time when the country is desperate to fund dollar-denominated fuel and wheat imports, but limited foreign currency reserves make it too expensive.

So last night on Egypt’s CBC channel, when TV host Khairy Ramadan called on all Egyptians – the business community, celebrities, Egyptian expatriates and ordinary citizens – to donate to a national fund to help Egypt out of its economic malaise, many Egyptians were happy to take part.

Anyone can deposit money into the “Egypt Fund” using bank account number 306306 (all Egyptian banks are accepting donations).

Within minutes, hundreds of Egyptians were calling to donate money to the cause.  Even children donated pocket money.

But one person in particular stole the show.  Mohammed Hawas, chief executive of Sahara Group, an engineering company declared that he would donate a whopping $5 billion.  (By the way, he was a presidential candidate in 2005, so undoubtedly, a political element is at play here…).

The national fund, trending on Twitter with the hashtag #EgyptFund, has already stirred debate.

For some, it highlighted the patriotic duty of Egyptians at a time of instability.  Some said if the donations continue at the same pace, Egypt would have no need to sign a loan from any other country or organisation, including the IMF. Some even went as far to say that Egypt could eventually lend money to the US and not the other way round.

Other viewers were more sceptical.  “I’ll believe it when I see the money with my own eyes,” said one unconvinced Tweep.  “So I should give up my money for the economy even if it doesn’t work?” asked another.

For all the discussion for and against the account, Egyptians should be reminded that this is a tried and tested method. Even under Mohammed Morsi, a “Renaissance Account” was opened encouraging the same donations, for the same cause.

It didn’t work that time (or we would have heard about it) and it is unlikely to work this time.

The account might be a crowd-pleaser rallying positive momentum for Egypt’s economy, but if the country is really serious about improving the economic situation, the interim government needs to move quickly on the formation of a cabinet so that the government can function properly and real reforms can be pushed through.