London - Egypt's crumbling public finances may be in even worse shape than previously estimated.
While stock and bond markets have cheered the ouster of unpopular President Mohamed Mursi by the army and Egypt's debt insurance costs have tumbled, data shows that financial risks are about to escalate.
The central bank's net hard currency reserves, which a country needs to pay for imports, are in negative territory if upcoming short-term obligations are included, indicating a looming funding crunch for Egypt unless it quickly accesses external aid.
The central bank has run through two-thirds of its cash reserves in defending the Egyptian pound since early 2011 as foreign investment dried up and the economy reeled after the uprising that toppled former ruler Hosni Mubarak. It has been unable to replenish them other than with top-ups provided by aid from Libya and Qatar.
Gross international reserves now stand at around $15bn, barely covering three months of imports, but even that figure is misleading, data shows. For one, it includes illiquid assets such as gold, and second, upcoming contractual obligations far exceed the amount of hard currency the bank holds in its buffers.
According to data from the International Monetary Fund and Bank of America/Merrill Lynch, reserves held in easily convertible currencies are more than $5bn in the red if measured against the central bank's forward obligations.
The central bank's position turned negative last November and has been steadily worsening ever since, the following graphic shows:
"When accounting for pre-determined and contingent short-term drains, net currency reserves are effectively in negative territory," said Jean-Michel Saliba, Middle East economist at BofA-Merrill in London.
Pre-determined and contingent drains as defined by the International Monetary Fund include scheduled contractual obligations in foreign currencies, foreign exchange guarantees and commitments on swaps, options and futures contracts.
These stand at over $11bn, IMF data shows, compared to Egypt's existing gross currency reserves of around $6.5bn.
"In the absence of fresh Arab aid infusion, Egypt has a space of six months to calendar year-end before the external position tightens markedly again and the sustainability of the current FX arrangement comes under severe strain," Saliba said.
Estimates of Egypt's financing needs vary. Saliba reckons on $33bn over the coming 18 months, including $14.7bn by end-2013 while analysts at VTB Capital estimate external funding needs of $19.5bn in the year through June 2014.
The central bank has been rationing hard currency access via a system of auctions but the pound is at a record low beyond 7 per dollar and forward markets are betting the authorities will not be able to hold the line much longer, pricing a roughly 20 percent depreciation in the coming year.
On the bright side for Egypt, a significant portion of these obligations consist of maturing dollar-denominated T-bills, which are mostly held by local banks and should be easy to roll over. These amount to around $5bn by end-2013, analysts say.
Souheir Asba, emerging markets strategist at Societe Generale, noted that a recent T-bill auction had seen healthy demand.
"The market is being over-optimistic about Egypt but they won't default. They will get a lot of external help if they request it," she said.
It is also possible for central banks to run negative positions for a period - the South African Reserve Bank for instance ran net negative reserves for years, hitting a deficit of almost $30bn in 1994.
Egypt's increasingly pressing funding crunch, however, suggests Cairo will be left with little option but to secure a $4.8bn IMF loan deal - something its post-revolution governments have been trying to avoid, fearing that subsidy cuts demanded by the lender could fuel further social unrest.