Egypt balance of payments gap narrows sharply in Q2

Egypt's Prime Minister Hisham Kandil talks during an interview with Reuters in Cairo September 9, 2012. (REUTERS/Asmaa Waguih)

CAIRO: Egypt's balance of payments deficit narrowed dramatically in the second quarter as foreigners sold Egyptian securities at a slower rate and invested more in the country's economy, according to figures released on Monday.

The balance of payments deficit narrowed to $107.5 million in the April to June quarter from $4.25 billion a year earlier, preliminary central bank figures showed.

Direct foreign investment leapt to $2.08 billion from $217.7 million during the quarter while a net decline in portfolio investment in Egypt slowed to $456.1 million from $1.58 billion.

The increased FDI may reflect income from the purchase by France Telecom in May of Egyptian mobile telephone company Mobinil, a deal that may have brought more than $3 billion into Egypt, analysts said.

Foreigners also slowed their sales of stocks and treasury bills during the quarter after having unwound most of their holdings in the year after the uprising that toppled Hosni Mubarak in February 2011. The uprising also scared away tourists, a major foreign exchange earner.

In addition, Saudi Arabia during the quarter deposited $1 billion with the central bank as budget support for Egypt's government.

The current account balance nonetheless continued to deteriorate during the quarter, with the deficit widening to $1.54 billion from $1.43 billion in the second quarter of 2011.

This was aggravated mainly by an expansion of the quarterly trade deficit to $8.17 billion from $6.43 billion. Tourism receipts on the other hand rose by $481 million to $2.33 billion.

The current account deficit for the entire 2011/12 fiscal year, which ended on June 30, grew to $7.9 billion from $6.1 billion, while the full-year trade deficit swelled to $31.7 billion from $27.1 billion.

The current account deficit was below the $8.2 billion forecast by Barclays economist Alia Moubayed, who said she was not surprised by the worsening balance of payments figures.

"Export growth and Suez Canal receipts since June are weakening, highlighting continued pressure on the current account," she said. "This only underscores the need to secure official support from bilateral and multilateral institutions as soon as possible and restore business confidence to encourage the return of private capital flows."

A new president was elected in June and his government is reaching out to donors including the International Monetary Fund for help shoring up the economy until foreign inflows recover.

The central bank has spent over half of Egypt's foreign reserves to defend the local pound currency, which has lost only about 5 percent of its value against the U.S. dollar since last year's street revolt.


Egyptian markets have picked up in recent weeks, with short-term treasury yields falling to their lowest in nine months and equities rallying to 14-month highs.

Foreigners bought 20 percent of a euro-denominated T-bill issue on Aug. 28. The yield on Egypt's eurobond maturing in 2020 is close to its lowest since the uprising, while analysts have cited reports that foreigners have been buying short-term treasuries in the secondary market.

In an interview with Reuters on Sunday, Prime Minister Hisham Kandil said he was finalising economic reforms that will rein in hefty consumer subsidies and he expected the economy to grow in the current financial year by 3 to 4 percent or more if investment goals are achieved.

Growth was around 2 percent in the 2011/12 year.

Kandil said the central bank was managing the currency in a flexible way but said investors should not delay.

The pound weakened from mid-June, before President Mohamed Mursi's election, to reach 6.107 on Sept. 2, its weakest since January 2005. It has strengthened slightly to 6.09 since then.

Moubayed said it appeared that the central bank had been accepting greater flexibility of the pound in the past three to four months.

"As Egypt prepares to enter an IMF programme that should help restore reserve adequacy, we will see more constraints in general on FX intervention and central bank financing of the budget deficit. Hence, a more flexible stance in the EGP is likely to prevail in the short to medium term," she said.

Kandil's government is in talks for a $4.8 billion IMF loan, although the plan carries political risks given the austerity measures and subsidy cuts that any deal is likely to entail.

One fixed-income trader in Cairo said he believed the latest gain in the pound was the temporary effect of foreign cash flows into Egyptian equities and treasury bills.

"I think we have some further room for depreciation," he said.





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