Reserves, Again

Last week, this writer commented on China's international reserves - at over $3.4 trillion, the largest in the world, and roughly equivalent to the size of the German economy. Such a hoard of foreign currencies (mostly US dollar-denominated assets), accumulated from years of large trade surpluses, allows Chinese policy-makers considerable flexibility to not just meet liquidity needs and manage the yuan exchange rate, but also to pursue strategic investments abroad, particularly in the resource sectors.

At the other end of the reserves spectrum, there is Egypt. With the country once again in the firm grip of the military, with yesterday's declaration of a state of emergency and the institution of a national curfew, and with the Arab spring political process towards inclusion and democracy apparently dead, at least for now, Egypt's already precarious financial position can only worsen. The International Monetary Fund has been standing ready for months. It has agreed in principle to disperse an emergency loan of $4.2 billion, but such funds will not be advanced until certain budgetary conditions are implemented (Egypt's budget deficit is estimated to be equivalent to 13% of GDP in 2013, a clearly unsustainable level). With its focus now almost solely on containing domestic unrest, General Sisi's military government is hardly likely to introduce measures restraining government expenditures, such as subsidies for bread and petrol. In the interim, certain Gulf states, notably the United Arab Emirates and Saudi Arabia - traditionally enemies of the Muslim Brotherhood - have been funneling financial support - reportedly as much as $12 billion - into Egypt, particularly since the army removed President Morsi from power on July 3. As a result, Egypt's reserves, which had been declining since the beginning of 2011 and had reached a critically low level in recent months, have risen, from the low of $13.4 billion last Spring to nearly $19 billion at the end of July. But even this improved level is barely sufficient to cover 3 months of imports. And as tourists and foreign private investors (the major sources, other than foreign loans, of hard currency) continue to withdraw from the country - especially after yesterday's events - Egypt's reserves will remain under pressure. More broadly, respite for the battered economy looks more unlikely than ever.   

America's response to yesterday's brutal military crackdown (over 500 are estimated to have been killed, and thousands wounded) will be crucial. President Obama, who so far has declined to use the word "coup" to describe Morsi's overthrow last month, spoke this morning from his vacation home on Martha's Vineyard. He condemned the military government's use of violence, but announced what can only be considered another minimalist, tepid reaction, cancelling planned, bi-annual joint military exercises. However, in the coming days, it seems likely that, short of withdrawing all its aid to Egypt, America will initiate a substantive, if nuanced, approach, such as a comprehensive "review" of its entire aid program accompanied by a delay in disbursing the next tranche. Much will depend on whether some sense of order can be restored in Egypt, difficult to imagine given that Islamists have already vowed new protests.