Taking a Loss to Get Money Out of Egypt
▶ Companies sell a local stock abroad to get paid in greenbacks ▶ “This trade is pretty crazy. … They must really want the currency”
One of the more active trades in Egypt’s stock market is a guaranteed money loser. Companies have been buying shares of Commercial International Bank Egypt (CIB), the country’s biggest publicly traded company. Purchasers pay in Egyptian pounds, then sell the shares in London for dollars. Companies are so desperate for dollars that they’re willing to swallow losses of as much as 30 percent on the trades, say four local brokers.
The Egyptian Exchange last year banned the practice for Egyptian investors, mandating they be paid for overseas stock sales only in pounds. The rule change still leaves the door open to foreign companies with Egyptian subsidiaries. Also, some Egyptians use offshore companies that they set up to pose as foreign outfits so they can continue to buy and sell CIB shares. Exchange officials declined to comment.
U.S. currency is in demand because successive governments since the Arab Spring have been unable to boost hard currency revenue, causing a drain on foreign reserves. The central bank’s controls on the exchange rate and the movement of capital have also forced Egyptians to hoard dollars or sell them for more than the official rate on the black market.
S&P Global Ratings cut Egypt’s credit outlook to negative from stable on May 13, saying it expected the foreign- currency shortage to persist as aid from Gulf Arab allies recedes. Egyptian authorities have devalued the pound several times, most recently in March, increasing demand for hard currency.
When the central bank sells dollars at its weekly auctions at the official rate of 8.88 pounds, it can satisfy only one-fifth of the bids, or about $120 million a week. Importers of food, medicine, and machinery get priority, leaving many foreign companies operating in Egypt unable to obtain the dollars they need to import goods or send profits home.
On the black market, the dollar sells for 10.95 pounds, according to a Bloomberg survey of street dealers, who handle only cash and thus aren’t of much use to big companies. Businesses using stock trades to exchange currency were paying an effective rate of 12.42 Egyptian pounds for each dollar, as of May 17 in London, Bloomberg calculates. “This trade is pretty crazy,” Luke Harris, head of arbitrage at Beaufort Securities in London, says of the stock deals. “The only reason anyone would do this is because they must really want the currency.”
Other countries have had similar experiences. After Argentina imposed currency controls in 2011, buying stocks and bonds in Buenos Aires and selling them on a foreign bourse for dollars grew so common that the exchange rate on the trades was widely known as the “blue chip swap rate.” The rate averaged 42 percent above the official rate until controls ended in December, data compiled by Bloomberg show.
In Egypt, European consumer- goods companies use the CIB trade to get dollars, say local brokers who spoke on condition of anonymity. Purchases in Cairo of CIB stock have pushed up the price 2.2 percent this year in dollar terms, while selling has driven down the London-traded shares 17 percent over the same period.
The proportion of CIB stock trading in London is approaching the maximum 33 percent of total shares the Egyptian Exchange allows. Because other Egyptian stocks that trade abroad aren’t as active as CIB, there’s no clear alternative for companies looking to use the method to access dollars, says Hany Genena, head of research at Beltone Financial, an investment bank in Cairo. “The window for acquiring dollars is closing, so it’s creating a rush among investors,” he says. The bottom line Dollars are so scarce in Egypt that the government must ration their sale, leaving companies unable to pay for imported goods.
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