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EGYPTIAN TRANSITION WILL BE LONG & SLOW

The historical political shake-up in Egypt will take time to resolve itself. Aside from the obvious fact of the Street’s resentment with the current regime, uncertainty will rein at least until September 2011, when the presidential elections are due. Until then, expect intermittent clashes with authorities as long the Street sees no moves progress towards transparency in the upcoming electoral process. In spite of the escalating risks and repercussions emerging from Egypt’s political upheaval, there are is an important comforting element of reality, which would reduce the threat of a full-blown regional crisis and emerging market contagion; The Egyptian Military, principal recipient of US aid and chief safeguard of national security, has clearly kept its hands off the current political transition. This improves its credibility in preserving civil, protecting resources, Suez Canal, banks and key businesses. The Military is aware of the importance of ensuring the smooth operation of the Suez Canal, which is not only a vital source of Egypt’s foreign currency receipts, but also ensures the supply/movement of crude oil. 10% of world trade flows through the Canal and 7% of its annual ship traffic carries crude oil.

The Egyptian pound hit fresh 6-year lows at EGP 5.85, as a result of selling from foreign and Egyptian investors holding equity and treasuries. Reports suggest business executives and former political officials have started transferring funds abroad. EGP is a freely convertible currency but remains subject to periodic intervention from the central bank via Suez Canal Bank and the Arab African International Bank. The last major intervention was in December 2009, aimed at capping the rate (preventing weakness) at EGP 5.70. The current uncertainty will likely erode another 5-7% in the EGP, dragging it towards 6.2. This could prompt foreign investors into reducing their FX exposure in their high yielding bills/bonds investments. ALTHOUGH EGYPTIAN BONDS/BILLS pay a hefty yield (3-mth T bills pay as much as 11.5% and 1- year pay 12.4%), investor selling could ensue to reduce FX exposure. THE LATEST DATA shows foreigners own a total of about EGP $147 billion ($25 bln) in Egyptian treasury bills and bonds, with about a fifth of the country’s EGP 274 billion in outstanding treasury bills and about 40% of EGP 199.2 billion in outstanding treasury bonds.

ASHRAF’s ARABIC INTERVIEW on CNBC ARABIA discussing Egypt, political risk, oil and the China question
http://www.youtube.com/watch?v=Ng8KuzTeoCk