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”

Bloomberg Businessweek (North America) - - Global Economics - �Ahmed Na­matalla, with Sofia Horta e Costa and Carolina Mil­lan Edited by Christo­pher Power Bloomberg.com

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.

The EU “makes me think of some badly de­signed un­der­gar­ment.” For­mer Lon­don Mayor Boris John­son urg­ing English fac­tory work­ers on May 16 to vote in fa­vor of Bri­tain leav­ing the Euro­pean Union

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