* Dollar fund aims to reassure foreign investors
* Scheme unlikely to work as well as a decade ago
* Investors fear further Egyptian pound slide
* Legal actions against business figures shake confidence
By Asma Alsharif and David Stamp
CAIRO, March 21 Egypt's revival of a scheme
meant to protect foreign buyers of government debt and stocks
will struggle to achieve a wider aim - easing an acute dollar
Earlier this month the central bank reopened a modified
version of a mechanism last used in 2003 which ring-fences
dollars invested in Egyptian securities.
This aims to reassure foreigners that they can recover their
hard currency when they sell.
But with no end in sight to the slide in value of the
Egyptian pound, foreigners fear that any pounds they earn on
their investments will be worth fewer and fewer dollars.
"Although a similar scheme was successful a decade ago in
halting a drop in the value of the Egyptian pound at a time when
foreign currency reserves were low, the current economic and
political landscape is very different," said Oliver Coleman, an
analyst at the Maplecroft risk consultancy.
"Egypt is a far less attractive prospect (today)," he added.
Whereas Egypt eventually stabilised the pound a decade ago
under autocrat Hosni Mubarak, the current democratically-elected
Islamist government has a much looser grip on the country.
Turmoil since the fall of Mubarak two years ago has shaken
business confidence, pushing the Egyptian pound sharply lower
even though the central bank has spent more than $20 billion
from reserves in trying to prop the currency up.
With reserves now at a critically low $13.5 billion,
covering little more than two months' imports, the central bank
is tightly rationing dollar supplies through currency auctions.
A $4.8 billion loan from the IMF has yet to materialise and
many investors and businesses are finding it nearly impossible
to get hold of dollars through the banking system. This is
forcing them to accept highly unfavourable black market rates.
Under the "Foreign Investors' Repatriation Mechanism",
reopened on March 17, foreign currency inflows through
commercial banks are sold to the central bank and parked in the
Foreign Investment Fund. When investors sell their Egyptian
assets, they can then withdraw the sum in dollars from the Fund.
But Mona Mansour, chief regional economist at CI Capital,
doubted the mechanism would achieve its wider aims, especially
after the public prosecutor froze the assets of 23 investors and
officials including some from Saudi Arabia and the United Arab
Emirates, while it investigates alleged stock market
"As long as the political risk remains high and investors
have their accounts frozen, I don't see foreign inflows
materialising," she said.
While a court overturned the asset freeze on March 20, the
investment climate remains fraught, with a number of senior
business figures under investigation or subject to travel bans.
But the overriding concern for foreigners is that a further
slide in the pound could wipe out even the relatively high
returns - 12-14 percent - on Egyptian treasury bills.
At 6.7881 to the dollar - the cut off at Thursday's foreign
exchange auction - the pound has now lost 9 percent since just
before the central bank dollar sales began late last year.
Its value has fallen to 7.0-7.25 on the black market and
forward contracts imply a dollar will cost at least 8.28 pounds
a year from now.
"It is most unlikely that any Egyptian-pound denominated
debt will be of interest to foreigners at the moment," said
Gabriel Sterne at Exotix in London.
Sterne believes local banks could keep on buying government
debt. "The state-owned banks in particular can be relied upon,"
he said. "They have increased their share of T-Bill holdings
from 14 percent to 22 percent of the stock between January 2011
and November 2012, and there is plenty of scope to increase
But that won't bring dollars into the economy - and
meanwhile the budget deficit is soaring to unaffordable levels.
Egypt has yet to start negotiating in earnest for an
International Monetary Fund deal which was agreed in principle
last November, but delayed due to violent protests.
The government forecasts the deficit will hit 189.7 billion
pounds ($28 billion), or 10.9 percent of gross domestic product,
in the year to June, up from 166.7 billion a year earlier.
This assumes urgent economic reforms are made. Without them,
the deficit is forecast to hit 12.3 percent of GDP.
"An IMF deal would be a key endorsement which would signal
to all concerned that Egypt gets back on the right path to work
through its current difficulties," said Giyas Gokkent, Group
Chief Economist at Bank of Abu Dhabi.