CAIRO: Egypt's central bank said it was prepared to allow the Egyptian pound to fall gradually in coming months if demand for the currency were to decrease, and that it was not targeting a specific exchange rate. Hisham Ramez, the central bank's deputy governor, also said the size of weekly treasury bills repurchases being introduced next Tuesday to provide liquidity to local banks would be set on the same day of the transaction. "It was always our policy. Our policy is always that we don't target prices" for the currency, Ramez told Reuters in an interview. "Our policy is that we need the market, that prices be reflected by supply and demand." "What we care very much for is availability and liquidity in the market," he added The central bank said Wednesday that the market for the Egyptian pound was stable and it would intervene only if there were imbalances or speculation. "It is a supply- and demand-driven market," Ramez said. "This does not mean that we are allowing a devaluation. We see that the currency market is very stable and functioning very well." He was speaking before Moody's said it had downgraded Egypt to Ba3 with a negative outlook. The central bank intervened on Feb. 8 after the currency weakened to 5.960 to the dollar, a six-year low, a step that strengthened the pound by more than 1 percent. Ramez said at the time that the central bank had intervened because the market was speculative, and it would do so again if necessary. Analysts say the value of the Egyptian pound has already weakened after some of the main pillars of demand, including tourism and foreign investment, collapsed during the weeks of protests that toppled the government of Hosni Mubarak. The pound has fallen by only 1.9 percent the dollar since the protests first broke out on Jan. 25. Mohamed Abu Basha, an economist with EFG-Hermes, forecast the pound, which closed on Tuesday at 5.924, would weaken to 6.30 to the dollar by the end of 2011. Mona Mansour, director of research at investment bank CI Capital, told Daily News Egypt this confirms that the CBE will continue supporting the local currency — as it did previously. “This will help the EGP to experience a gradual devaluation rather than following a highly volatile trend,” she added. In a note, Beltone Financial said, “While we believe the CBE will allow a gradual depreciation of the Egyptian pound, it is likely to step in again and support the pound in case of an accelerated, temporary, depreciation … as it did in February after two days following the re-opening of the markets.” In Beltone's view, the “Egyptian pound will continue to depreciate, gradually, over the coming months by virtue of the trade deficit, although weaker imports' growth, linked with an overall slowdown in economic activity, will limit the pace at which this happens.” The exchange rate's avoiding short-term volatility depends on the clarity of the political situation in Egypt. “The CBE is trying to lean against the wind,” Magda Kandil, director of research at the Egyptian Center for Economic Studies, told DNE, adding that intervention is necessary to stem depreciation pressures. However, the CBE must realize that the best line of defense is improvement in the fundamentals of the economy and regaining confidence in the Egyptian pound. Commenting on the Central banks focus on liquidity, Kandil said it is an indirect way of influencing the exchange rate: if liquidity pressures increase (i.e. demand for the dollar increases relative to supply), the CBE would intervene to avail more dollars in the market. By doing so, the bank would be managing liquidity but effectively stemming depreciation pressures on the currency “In the near term, the statement indicates some flexibility, however, most likely it will be a managed flexibility. That is, there will be a target band where the CBE would intervene by availing additional foreign exchange to stem significant depreciation that could increase inflationary pressures,” she said. Kandil thinks a combination of flexibility and intervention will be necessary. “This could be in the form of a managed float with a target, maybe unannounced, for a band. However, going forward, more flexibility will be needed, provided that the economy is back to a stable mode and the demand and supply of foreign exchange is back to normal.” “Right now, the situation is difficult because of excessive demand, mostly due to lack of confidence, and shortage of supply,” she told DNE. Transfers abroad The central bank has placed no restrictions on foreign investors transferring money out of Egyptian pound or out of the country, but it has delayed settlement of transfers larger than $100,000 by Egyptians to five days from the previous two. This is to allow the authorities to make sure the transactions were "genuine" and was only a temporary measure, Ramez said. Bankers say the longer settlement dates were designed to give the government time to investigate transfers by Egyptians close to the ousted government to make sure their money had not been obtained illegally. Ramez said the central bank had been preparing for $8-10 billion in transfers out of pounds immediately after Egyptian banks reopened on Feb. 6 after a one-week closure caused by the unrest, but only about $1.7 billion was transferred the first day and about $1 billion on each of the next two days. He said the central bank was drawing down its reserves to cover a balance of payments gap as a temporary measure until the economy got back on its feet. According to central bank figures, official reserves fell by $1.7 billion in February to $33.3 billion and unofficial reserves by another $3.3 billion. "It's being used to cover the gap due to the balance of payments. It reflects exactly what's happening in the balance of payments," Ramez said. Repos Ramez said a system of weekly treasury bill repurchases in the money market that the central bank announced last week would make sure local banks had enough liquidity after foreign investors sold T-bills during the political turmoil. The central bank last week said the repurchase agreements were designed to keep short-term interest rates under control. "We definitely think the banks will be needing some liquidity in the market in the coming days, because the banks came in when the foreign investors came out of treasuries," Ramez said. "Local banks had an opportunity to take good prices and jump in. So they will be needing some bridge liquidity," he said. "There are still some banks that are long. This is a stand-by facility that's there. Maybe nobody will touch it. It's there whenever a bank needs liquidity. The central bank will announce the amount of bills it is prepared to repurchase on the day of each operation, and its Monetary Policy Committee will set the price once every six weeks at its regular meetings, he said. "Every Tuesday we'll decide the amount, depending on our reading of the market," Ramez said, adding that banks would also be able to do repurchase agreements between themselves during the rest of the week. "So the market can work in between, or they can come to us," he said. The MPC at its meeting on Thursday said the initial seven-day repo agreements would be priced at 9.25 percent. Under its current overnight corridor system, the central bank offers banks 8.25 percent for deposits and 9.75 percent for lending. Repos are a way for central banks to lend funds into the market in exchange for temporary custody of securities. –Additional reporting by Daily News Egypt's Amr Ramadan.
