The scarcity of US dollars in Egypt is discouraging foreign, and even Arab, investors from bringing money into the country.
Egypts net foreign assets have again dropped to $16.4bn in October, after the boost earlier in 2015 from GCC countries depositing $6bn with the central bank. This barely covers three months of imports, the minimum acceptable level.
Egypts trade deficit for the financial year 2014-15 is $38.8bn, according to the Central Bank, and debt service requirements mean reserves are expected to drop further in the coming months.
There could be a mini-currency crisis quite quickly and that would damage sentiment, says a Cairo-based analyst. Investors are not being given comfort that enough will be done.
The recent plane disaster in Sinai and the subsequent controversy over security at the Sharm el-Sheikh airport will damage the tourism industry. The expected crisis for this important source of foreign currency will exacerbate the situation.
The currency shortage and strict regulation is putting strain on economic activity. Markits Emirates NBD Egypt purchasing managers index dropped from 50.2 in September to 47.2 in October, slipping into decline.
Currency availability is definitely an issue, says Omar el-Maghawry, deputy CEO of Bahrains First Equity Partners, which owns industrial companies in Egypt including Egyptian Steel. For manufacturing companies, there is a problem queuing to open LCs [letters of credit] at the banks to import raw materials for the industrial sector.
Potential investors are waiting to commit if they do not know how they will repatriate their profits, while existing investors are waiting up to a month to secure dollars to transfer funds out.
Numerous regional and international bankers have told MEED they are unwilling to lend on projects in Egypt until they are offered government guarantees on the availability of currency.
Only private equity investors see Egypt as a good environment to invest in right now.
Private equity investors are looking at the long term, so the inefficiencies are always good news because it means good entry levels, and when the market is looking good it is the best time to exit, says El-Maghawry. If you are a short-term investor, such as a stock trader, it is a horrible time because of the volatility.
The Egyptian Exchange EGX 30 index fell 9.5 per cent between 5 and 10 November, as speculation intensified over whether the Sinai plane crash was due to a bomb.
Some investors use offshore structures to avoid having to wait for dollars on major transactions. This means the foreign direct investment (FDI) never actually enters Egypt, deepening the currency shortage.
The vicious circle of declining confidence among investors means quick decisive action is needed to reassure investors.
The currency system needs to be unclogged, says the analyst. They should make the back payments to oil and gas contractors, increase FDI and prioritise which sectors get dollars.
Currency devaluation would ease the availability of foreign currency. Egypt has already devalued the pound several times in 2015, but has been reluctant to do so again.
The local press has reported moves to support the pound in the short term, such as state-owned banks raising interest rates by 2 per cent.
Further devaluation is seen as inevitable. While the foreign exchange auction rate is £E7.9 to $1, according to the central bank, black market transactions are at higher rates and investors expect it to reach £E10 over the next few years.
However, a complete devaluation or liberalisation would be an inflationary shock to Egypts economy, and run down reserves faster in the short term. Egypt is the worlds largest wheat importer, at 11 million tonnes a year, according to the UN Food & Agriculture Organisation. It also relies on importing natural gas, fuel and consumer goods.
Inflation is already running at 9.7 per cent annually in October, according to the central bank.
You cant have an immediate devaluation because Egypts imports are inelastic, says the analyst. There are not enough exports and they have to build these up as they devalue gradually.
It is more likely the devaluation will happen in several stages.
Observers are positive about the new central bank governor, Tarek Amer.
We hope the new governor of the central bank will address the issue with a different view and a more flexible approach, says El-Maghawry. We need more visibility and we are asking him to announce his foreign policy whether and how quickly we can expect devaluation and whether he will keep controlling the currency. This ambiguity is also a painful thing on planning future acquisitions and business plans for existing companies.
The central bank intensified its tight capital controls in 2011 in reaction to the shortage, to combat a large black market for currency.
But without the parallel market, businesses are struggling to import raw materials and equipment.
Relaxing the controls could encourage foreign currency in the black markets to enter the official system, relieving pressure.
We would like the central bank to be more flexible on the deposits of foreign currency, especially for companies, says El-Maghawry. There is a lot of money in parallel markets, but there are restrictions on cash deposits that make it impossible to bring this foreign currency from the parallel market into the banking sector.
In the long term, Egypts foreign currency reserves can only be restored to health by economic and export growth. The government is working hard to stimulate growth, but questions are growing over whether they will be successful.