CAIRO Egypt's commercial banks will take a leap into the unknown when they reopen on Sunday after a week-long closure due to political unrest.
There may be chaos in bank dealing rooms as foreign investors and local businessmen flee the Egyptian pound after 12 days of street protests paralysed much of the economy and dried up important sources of foreign exchange.
With the political crisis still unresolved, banks may see panicky withdrawals of cash by Egyptians worried that access to their deposits could be restricted again. Banks may be too nervous to trade with each other in the domestic money markets, a source of funding for them.
Deputy central bank governor Hisham Ramez has said the central bank, which had $36 billion (22 billion pounds) in official foreign reserves at end-December, will use them as necessary to cover withdrawals and transfers and stabilise the financial system.
"There is no problem. We will be able to honour all transactions," he told Reuters on Thursday.
But the stock exchange's sudden decision on Saturday to stay closed on Monday next week, instead of reopening as originally planned, suggests authorities are not confident that the financial system will resume smooth operations quickly.
In an effort to reassure investors their money is not trapped in Egypt and prevent them from using unofficial channels, the central bank has said it will allow unlimited money transfers between accounts when banks reopen, restricting only cash withdrawals by individuals.
Capital flight could be massive in the days after the banks reopen. Shortly before they closed, currency traders estimated some $500 million or more was leaving the country daily, and political violence has worsened since then.
Until political uncertainty eases, which could take weeks, flows of funds into Egypt from key sources are likely to be disrupted though not completely ended. Egypt has been receiving roughly $280 million a week from tourism and $235 million in remittances from Egyptians working abroad.
The government will be reluctant to let the Egyptian pound weaken sharply because that could drive up the price of imported foodstuffs, one of the factors that sparked the countrywide unrest. The central bank may therefore use its reserves to supply dollars in the market and support the pound.
Ramez this week dismissed concern that the pound might weaken sharply. "This is not true. We don't comment on currency matters, but this will not happen," he said.
Some private currency exchange shops were open in central Cairo on Saturday and one was selling dollars at 5.89 pounds each, not far below the pre-crisis rate of 5.855.
"The central bank usually acts wisely in depreciating the pound. It won't want to add to the panic," said a Cairo-based treasury room dealer.
But if downward pressure on the pound persists over days, the central bank may have to deplete its reserves so rapidly to support the currency that it may acquiesce in some depreciation.
UBS Investment Research predicted on Friday that the pound could fall by as much as 25 percent within a month, which would put it well below 7.00 against the dollar. Credit Agricole suggested on Thursday that the pound could fall 20 percent "over the short term."
The government may then seek to offset the impact of a weak currency on food prices through subsidies, damaging its finances. Egypt ran a budget deficit of 8.1 percent of gross domestic product in the last fiscal year to June, and ratings agencies downgraded its debt this week because of the potential impact of the political unrest on its fiscal health.
The government is taking steps to limit the expected flood of withdrawals by depositors when banks reopen. Latest data show the system had 824.6 billion pounds worth of non-government deposits at the end of November, 664.2 billion pounds of which were in Egyptian pounds and the rest in foreign currency.
Pensioners and government employees could start taking limited amounts from cash machines last Wednesday, easing some of the pressure, and daily cash withdrawals from Sunday will be restricted to 50,000 Egyptian pounds and $10,000 worth of foreign currency.
The restriction is "an indicator that they're concerned about a run on the local banks. That's very important," said John Sfakianakis, economist at Banque Saudi Fransi.
Only selected bank branches in Cairo and major provincial cities will reopen initially, and operating hours will be restricted to 3-1/2 hours, beginning at 0800 GMT. The central bank released a list of 341 bank branches that would operate on Sunday, including 152 in Cairo.
But the limited opening hours may only increase a sense of panic among depositors lining up at branches on Sunday.
The government has promised to redeem 3.5 billion pounds ($600 million) of matured Treasury bills on Sunday and another 17 billion pounds of maturing bills on Tuesday.
This will provide an infusion of funds into commercial banks, and the central bank will also offer them funding if necessary to ease any payments difficulties.
"Banks can always come for central bank facilities," so the interbank money market "will not dry up," Ramez said. The central bank's overnight facility for banks pays 8.25 percent for deposits and charges 9.75 percent for lending.
But the unstable political situation may disrupt such operations. It is unclear how many bank employees will return to work on Sunday; many major bank dealing rooms are located within a few hundred metres of Cairo's Tahrir Square, the focus of the protests. Tanks were parked around banks in the downtown financial district on Saturday.
The government urgently needs to get the banks working again partly so it can finance itself. It was due to sell 4 billion pounds of T-bills last Sunday but was forced to cancel the auction; it plans to resume bill auctions on Monday. Local banks will likely subscribe to the first bill sale to cooperate with authorities in restoring stability, but the sale will be a severe test of the confidence of foreign investors.
(Editing by Andrew Torchia)
($1=5.857 Egyptian Pound)