A somewhat contrarian Reuters analysis this afternoon should calm those panicked by Egypt’s currency woes:
The key to preventing a messy devaluation of Egypt’s pound may lie with the country’s households, whose dollar holdings are being eyed by foreign investors as a critical gauge of trust in the authorities.
So in fact, it is “not the withdrawal of foreign investors from a market but the flight of local households and businesses from a currency that is instrumental in [the pound’s] collapse,” according to the article.
That means that despite what all those big foreign investors might be saying about the collapse of the pound, take no notice, because it’s ordinary Egyptians who are critical to avoiding a currency crash.
“Increased household dollarization and a run on the currency, that’s the big risk,” says Jean Michel Saliba, BofA-Merrill Middle East economist, who estimates households account for more than 70 percent of deposits in the banking system.
In contrast, foreigners hold a mere 3-4 percent of the local bond market, according to other estimates from Barclays.
This is an important indicator of how public perception is crucial and inherent to economic stability. The Morsi administration’s handling of the IMF loan negotiations – which have lasted almost 20 months, have contributed to worries over the economy.
But it was a series of bad decisions (1) pushing through an unpopular constitution, 2) issuing an “all-powerful” decree and then backtracking and 3) announcing tax hikes, and then suddenly suspending them) that have only served to undermine confidence in the economy and push panicked Egyptians to swap their pounds for dollars.
Essentially, if the government wants to stop the run on reserves and the pound, President Morsi must convince the nation he is in control. Right now, that’s exactly what the public do not see.