Factbox: Protests and Egypt's financial markets

Fri Jan 28, 2011 5:25pm EST

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(Reuters) - Egypt's financial markets have been badly shaken since the biggest anti-government demonstrations of President Hosni Mubarak's 30-year rule broke out on Tuesday.

Here are some facts about the main markets:

THE EGYPTIAN POUND

The Egyptian pound, which weakened to a six-year low after two days of protests, is entirely convertible, but the central bank tightly manages its movements against the dollar with a view to maintaining stability, allowing it to fluctuate gradually to reflect demand and supply. Currency traders say the bank often intervenes indirectly to maintain the currency at preferred levels via two commercial banks, Suez Canal Bank, which receives dollar receipts from the Suez Canal Authority, and Arab African International Bank, whose capital is partly held in dollars. Traders say the central bank made a rare direct intervention in December 2009 to keep the currency from weakening below 5.70 to the dollar, but there has been no sign of direct intervention since the current protests began. It weakened to 5.855 on Thursday, the last trading day before the Egyptian weekend.

The pound would come under particularly strong pressure if foreign and Egyptian investors were to accelerate the sale of their equity and treasuries holdings. One trader in the treasury room of a bank said several business executives had transferred funds abroad. Some of Egypt's leading businesses executives have close links to the ruling party.

THE EGYPTIAN STOCK EXCHANGE

Egypt's benchmark index of 30 shares tumbled 7 percent in four days after Tunisia's president was ousted from power, then fell another 16 percent in two days following the outbreak of protests in Egypt on Tuesday. Because of its relatively large size and sophistication, Egypt is heavily weighted in many investment funds dedicated to the Middle East and Africa, which tend to invest in a handful of blue chips such as Orascom Construction Industries and Commercial International Bank. Local retail investors, who tend to invest more speculatively and in smaller companies, are particularly well represented in the market, and in the days since the Tunisian president's ouster the more broadly based index of 100 shares has tumbled even faster than the main index, losing 29 percent.

GOVERNMENT FIXED INCOME

Holdings of treasury bills by foreigners soared over the past year as investors took advantage of a flood of cheap dollars to buy Egyptian government paper, especially shorter term T-bills that carry yields of around 9 or 10 percent. As of the end of November, foreigners held 61.30 billion Egyptian pounds ($10.5 billion) worth of the country's 274 billion Egyptian pounds in outstanding bills. Analysts say the lack of an active secondary market has dampened the appetite for government paper, especially longer maturities, forcing the government to add a risk premium that has pushed up its cost of funding. The development of secondary trading has been hindered by rules that allow only 15 commercial banks to buy treasury bills and bonds directly from the government, an arrangement that has allowed them to use their deposits to sit on easy and traditionally risk-free sovereign debt [ID:nLDE6670ZF]. The government also had treasury bonds worth 199.2 billion pounds outstanding as of the end of November, with various maturities of up to 20 years.

It is too early to gauge the impact on treasury bills, which many investors hold to maturity, but an increased yield of 40 basis points to an average of 10.62 percent at an auction of 182-day bills on Thursday suggests the central bank is having to pay more to attract buyers.

CORPORATE BONDS

Only a handful of Egyptian firms -- Mobinil, Ezz Steel, GB Auto and Orascom Construction Industries (OCIC.CA> -- have bonds outstanding, and these trade infrequently. The government has taken a number of steps over the past year to make it easier to issue bonds, including the simplification of the regulatory process and the introduction of a rule allowing corporations to issue bonds in batches.

CREDIT DEFAULT SWAPS

The cost of insuring Egyptian debt against default jumped after demonstrations began on Tuesday. During the crisis Egyptian five-year credit default swaps (CDS) have risen to 405 basis points, the highest since April 2009, data from Markit showed on Friday. They traded at 320 bps on Jan 17.

(Editing by John Stonestreet)

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