Egypt caught in maze as politics spur currency risk

The power struggle between Egypt’s military and the self-proclaimed Islamist president-elect risks prolonging a financial crisis that threatens to expedite a currency devaluation and trigger more credit-rating cuts.One-year Egyptian pound forwards weakened to a record after the military took steps to curtail powers of the president chosen in the country’s first free election. The Muslim Brotherhood, which declared its candidate Mohamed Mursi the victor, said it would join other political groups in a mass anti- military protest yesterday. Egypt’s default risk rose to the highest since 2009, placing the country among the world’s top 10 riskiest credits, according to data provider CMA.“The immediate concern is the currency if the conflict deteriorates,” Alia Mamdouh, an economist at Cairo-based investment bank CI Capital, said by phone on Monday. “The problem from day one was the prolonging of the transition period, and now they are extending it again. It’s like getting out of one maze to find ourselves in another.”The military’s move to retain interim legislative powers and choose members of a panel to draft a constitution followed a court ruling calling for the dissolution of the Islamist-led parliament, a development Moody’s Investors Service deemed as “credit negative.” Prolonging the transition to civilian rule may lead to a fifth cut to Egypt’s debt rating by Moody’s since last year’s revolt to its sixth-highest junk ranking, Mamdouh said. Moody’s had extended its review of the nation’s debt pending the election outcome and results of talks for a $3.2bn loan from the International Monetary Fund.Another reduction would put Egypt’s credit worthiness one level above Caa1, a class Moody’s gives to issuers “of poor standing” which “are subject to very high credit risk.” One-year non-deliverable pound forwards weakened to 7.95 a dollar at 1.08pm in Cairo yesterday, indicating investors expect the currency to slump 24% in 12 months from a spot rate of 6.0493 a dollar. The pound is subject to a managed float. The yield on Egypt’s 5.75% dollar bonds due in April 2020 climbed one basis point, or 0.01 percentage point, to 6.95%, the highest on a closing basis since May 21, and taking this month’s gain to 13 basis points.The army’s move will leave the elected president “with limited powers, making him more like a weak prime minister, in addition to a transitional period that has no time frame,” former lawmaker Amr Hamzawy wrote on his Twitter account.Mursi and his opponent Ahmed Shafik, Hosni Mubarak’s last premier, both claimed victory in the two-day runoff election, the official results of which are set to be announced tomorrow. State-run news website Ahram Online and newspapers such as Al Shorouk placed Mursi ahead in the race, citing tallied votes.“In either case, with no functioning parliament, we see further delays to the rewriting of the constitution and the disbursal of IMF funding,” Dubai-based HSBC Holding economists Simon Williams and Liz Martins wrote in a report on Monday.A Shafik victory “would likely be perceived as a reversal of the achievements of the revolution, with large-scale protests and unrest likely to result,” they wrote. Mursi’s win would pit him against the military, which will act as the legislative power until a new parliament is elected.The Washington-based IMF has linked approval of its aid agreement to attaining broad political consensus behind the government’s economic programme. Analysts such as Raza Agha, London-based senior economist at Royal Bank of Scotland Group, have said the IMF loan will help mobilise more external financing needed to ease the deepening economic crisis.Economic growth in the nation of around 85mn people stalled after last year’s revolt as tourists and investors stayed away. Five-year credit default swaps rose three basis points to 660 yesterday, according to CMA, which is owned by CME Group and compiles data from the privately negotiated market.The nation’s default risk has risen as its foreign reserves plunged more than 50% since the start of the uprising. Reserves rose 2% in May to $15.5bn, central bank data compiled by Bloomberg show.The central bank has so far managed to cap the pound’s losses at 3.8% since the uprising broke out in January 2011. Still, while reserves may climb because of financial support from Saudi Arabia, they are “likely to remain below the country’s external financing requirements” of $17bn in the next 12 months, according to Royal Bank of Scotland estimates, Agha said in an e-mailed report on Monday.That may make it more expensive for the government to borrow money. The Ministry of Finance sold 1bn pounds of three-month treasury bills on Monday at an average yield of 14.753%, the highest since Bloomberg started tracking the data in 2006. The government plans to raise $500mn in one- year dollar-denominated treasury bills today, central bank data on Bloomberg show.“The main concern is that politics are not allowing for focus on economics, which means reserves’ decline may well continue,” Agha said by e-mail. “Declining reserves will obviously hit the pound, putting Egypt’s macroeconomic stability at stake.”