Home In The News Financial Crisis Looms Over Egypt

Financial Crisis Looms Over Egypt

By: EW News Desk Team Date: 1 February 2011

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Always on the look out for the latest news to monitor the state of the world economy.

01 February 2011

If Egypt's turmoil continues much longer, the country may not have enough currency reserves to avoid a long term financial crisis.

Currency traders said on Monday investors have transferred hundreds of millions of dollars out of the country since the start of the protests last week.

Banks are still closed throughout Egypt and markets are suspended.

Many fear that once they open, additional millions of dollars will be withdrawn immediately.

The government had $36bn in foreign reserves at the end of December, central bank figures showed,

which suggest there is no immediate danger of a balance of payments crisis.

But scenes of chaos at Cairo's main airport, as both foreigners and Egyptians try to get flights out of the country,

indicated outflows of money could reach damaging levels over the medium term.

Robin Amlot, managing editor of Banker Middle East, says people are starting to "run out of the basics, which will feed into inflation".

"The banks say they are very liquid at the moment, but it's a question of not just what happens in Egypt, but also elsewhere in the region," Amlot said.

"All you have to do is look at the stock markets in the rest of the Middle East and in the Gulf,

and see what an impact that the turmoil in Egypt has had.

It is damaging business all around the region."

Egypt has a financial war chest, "but the war chest is going to be depleted

if this situation continues for several weeks rather than a few days,"

John Sfakianakis, chief economist at Banque Saudi Fransi, said.

"When markets begin to make bets against (the Egyptian pound), it will have a severe impact.

The whole fiscal position of the Egyptian economy is going to be put to a very hard test if the violence, rioting continues for several weeks," Sfakianakis said.

Egypt also faces a dilemma over reopening its banks.

It will probably need to reopen them within days to avoid serious damage to the economy, and to continue funding itself.

"People are running out of money, this is clear.

We expect that when banks do reopen, there will be quite a run," said one Cairo banker.

It is also unclear whether banks will continue do to business as usual with each other during the turmoil.

Oil prices extended gains above $89 a barrel on Monday in Asia

as the Egyptian protests threatened to spread unrest across the oil-rich Middle East.

Amid the instability in Egypt, jittery traders pulled money from stocks to buy oil, gold and the dollar,

which are considered less risky in uncertain times.

Meanwhile, Nissan Motor Co. has temporarily stopped production in Egypt for one week starting on Sunday following the protests in Cairo, a spokesman said.

Japan's second-biggest automaker assembles the X-Trail, Sunny and Pickup models at the knock-down factory in Giza, near the capital.

Economists also worry about how the protests will affect Egypt's Suez Canal, a crucial artery that processes 10 per cent of world trade.