November 27, 2018 / 4:32 PM / 16 days ago

Egypt's state banks helping to support currency - bankers, economists

* Egypt keeping pound steady as other EM currencies sag

* Authorities want to avoid speculation, curb inflation

* IMF-backed reforms preclude central bank intervention

* State-owned commercial banks help absorb dollar demand

CAIRO/DUBAI, Nov 27 (Reuters) - Egypt’s central bank has enlisted the help of state-owned commercial banks to keep the Egyptian pound from weakening against the dollar by getting them to supply any extra hard currency the market may need, bankers and economists say.

The pound has held steady in a narrow band of 17.78-17.98 to the dollar over the last six months - even as foreign investors have fled emerging markets around the world, including Egypt’s.

The central bank is not able to support the currency directly. In 2016 it abandoned an expensive campaign to support the pound, letting it float freely under reforms that persuaded the International Monetary Fund to lend Egypt $12 billion.

Since then, the IMF has urged Egypt to keep its exchange rate flexible, arguing this will in the long run keep inflows of foreign capital more stable. But Cairo is keen to avoid speculation against the currency and to curb inflation. Annual urban price inflation hit 17.7 percent last month.

Rather than returning to direct intervention, the central bank is enlisting the help of state-owned commercial banks to keep the pound steady, several bankers and economists said.

The central bank did not respond to questions on the matter.

As portfolio funds flow out - foreign ownership of Egyptian Treasury bills and bonds fell $8 billion in the six months to the end of September to $13 billion - supplies of dollars needed to support the pound are mainly coming from the banking system, rather than from the central bank’s reserves.

The two biggest state-owned commercial banks seem to be taking up most of the slack, often stepping into the interbank market towards the end of the day to fill outstanding requests for dollars, seven bankers and several economists told Reuters.

“I could be unable to fill an order until 2 or 3 p.m., and then all of a sudden the National Bank of Egypt and Banque Misr come to the rescue,” one banker told Reuters. “So they’ve been supplying dollars in that way since the flotation.”

The two state banks could not immediately be reached for comment.

In the interbank market, NBE has been offering to sell dollars for 17.88 pounds and Banque Misr for 17.89 pounds, while private banks offer to buy them for up to 17.95. But bankers say the state banks rarely if ever make trades at 17.88-89, selling dollars closer to the central bank’s fixing rate of about 17.91.

“The National Bank of Egypt and Banque Misr - more so with NBE - support the market when things get a bit dry,” a second banker said. “They basically come to the rescue and start selling dollars to banks that need them.”

Bankers say the central bank also sometimes calls up private banks to inquire why they let the pound weaken, a move which the bankers take as a sign of displeasure.

IMPACT

Some major emerging economies such as China or India use state-owned banks to step in and help smooth currency movements when markets are under pressure.

But these countries allow considerable movement in exchange rates, whereas Egypt has been holding its exchange rate steady.

The impact of the policy can be seen in a sharp decline in the net foreign assets of the commercial banking system, which plunged by $8.5 billion in the six months to the end of September to $12.2 billion.

Economists say there is no immediate threat to the financial system. Foreign reserves are at an all-time high of $44.5 billion, remittances from Egyptians abroad rose to a record $26.5 billion in the year to June, and a black market in dollars has disappeared.

All this suggests Egypt may be able to resist pressure on the pound for many more months or even years. Requests by bank customers for foreign currency are being met through the interbank market without major delays, bank treasury officials and other senior bankers say.

But if demand for the Egyptian currency weakens further over the long term without any exchange rate adjustment, capital inflows could shrink, Egypt’s exports might become less competitive, and foreign exchange reserves could be run down.

Editing by Andrew Torchia and Hugh Lawson

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