Government To Survive Currency Crisis
BMI View: T he Syrian pound , whose value has plummeted dramatically over recent months, will remain weak, ensuring that consumer price inflation stays elevated over the coming quarters. The regime will nevertheless manage to cling on to power for now , mainly as a result of external financial support by key allies.
The Syrian pound has been weakening steadily in the unregulated market over the last few months. The currency was trading at SYP190/US$ in black market transactions on August 15, having hit an all-time low at SYP320/US$ at the end of June. The unit had been trading within the SYP70-90/US$ band through 2012, compared to SYP47/US$ before the beginning of the civil war in March 2011.
Ongoing political instability and international sanctions on the country's hydrocarbon sector are drying out sources of foreign currency. The EU ban on oil imports from Syria, which was enacted on September 2011, is estimated to cost Syria's economy US$400mn a month, and it has been the major single cause of the collapse of oil exports over the past two years. Tourism, which accounted for 12% of gross domestic product before the war, has collapsed. As a result, the country's stock of foreign reserves is coming under strong pressure. Reserves dropped by 22.2% between December 2010 and June 2011 (the latest month with available data), and are clearly being depleted further. Oil sanctions and disruptions to supply lines have cost the government at least US$13bn by its own reckoning, suggesting that much of the government's US$18.7bn in reserves before the uprising has been depleted. The situation is deteriorating further as the ongoing fragmentation of the country between government and rebel forces is further disrupting trade. In a recent major development, rebels took over the northern city of Raqqa in March, where a significant proportion of the country's oil is produced, resulting in a further decline in revenues for Damascus. As a result of deteriorating economic conditions, Syrians have increasingly moved their savings in the national currency to foreign currencies, hence the ongoing depreciation of the pound in the unofficial market.
|Devaluation To Continue|
|Syria - SYP/US$ Exchange Rate, Official & Street Market|
The Central Bank of Syria (CBS) and the government have devised a series of policies in order to stem the fall in the value of the pound and the depletion of foreign reserves. The Syrian pound was devalued by 39.6% in the official market on May 15, and a managed devaluation has continued since then. The unit was trading at SYP108.7/US$ at the time of writing on August 19, having lost 132.8% of its value since the beginning of the revolution. Monetary policy makers intervened in the market to sell US$8mn to banks at a SYP175/US$ rate on June 19 in order to fund imports. The government also banned the use of foreign currencies in unauthorised business transactions on August 4, with offenders facing prison sentences of up to three years. In the latest move, Syria's 15 private banks were allowed on August 15 to sell dollars to Syrians at a rate fixed by the central bank at SYP175/US$, in an effort to relieve pressure on the currency in the unrestricted market.
Deputy Prime Minister Qadri Jamil said on June 19 that the government intends to strengthen the pound's exchange rate to between SYP100-120/US$. Some of the policy makers' moves arguably succeeded in stabilising the currency over recent weeks. However, it is clear that as a result of the dire conditions of the economy, the pound will remain weak over the coming quarters. We forecast the unit to average SYP120/US$ and SYP140/US$ in the official market in 2013 and 2014, respectively.
|On A Firm Upward Path|
|Syria - Components Of CPI, % chg y-o-y|
Inflation Heading Higher
According to Mayaleh, consumer price inflation (CPI) in Syria reached 40.0% in May. Despite the paucity of data coming out of the country, it is nevertheless clear that the inflation rate is currently much higher. The ongoing civil war is causing severe disruptions to supply lines and trade routes, as well as damaging industrial and agricultural production. Moreover, the ongoing devaluation of the pound is making imports increasingly expensive, which will contribute in particular to elevated energy and food prices. According to reports, the price of eggs increased by 50% in a in one day in the middle of August, with prices having increased by 400% since 2011. Furthermore, the price of chicken increased by more than 4 times in a matter of days. In addition, housing prices are on the rise as Syrians are increasingly investing in the real estate sector as the value of the pound plummets. Hussein Youssef, manager of Syrian real estate company Aram Real Estate, said in June that he had received more queries over the previous two months than in a year since the start of the uprising, with more than 60 potential customers having contacted him after the black-market exchange rate hit SYP130/US$ in April.
We project consumer price inflation averaging 60.0% in 2013 and 25.0% in 2014, compared to our estimate of 50.0% in 2013. That said, our forecasts are based on official data, and we caution that the current rate of inflation could be much higher. Indeed, according to reports, the headline inflation print may have come in at above 90% y-o-y in July, with the Syrian economy having entered hyperinflation territory. More broadly, we believe that it remains highly challenging to extrapolate significant inflationary trends across the entire country, given that inflation and access to goods depends on the region, the nature of the rebel groups in the area and the presence of government forces.
|Bottoming The Bunch|
|MENA - Short-term and Long-term Political Risk Rating, Out of 100|
Regime Likely To Cling On to Power
Syria's regime is finding it increasingly difficult to finance expenditure amidst the ongoing political and economic crisis. Damascus nearly doubled the price of diesel fuel in June in order to cut on the cost of subsidies, only the latest increase in energy prices over the past two years. Damascus announced price increases for medicines in July, and lifted a ban on the U.N. World Food Program bringing in medicines, a further sign that Damascus is struggling with importing goods of first necessity.
We believe that the regime will be able to cling on power despite the ongoing economic crisis, mainly as it will benefits from financial support from key allies. Syria's deputy prime minister for the economy Kadri Jamil declared at the end of June that Russia, Iran and China were supporting Syria's international financial transactions, as well as delivering US$500mn a month in oil and extending credit lines. According to Syrian officials, the country is currently handling all new import deals in Iranian rials, Russian roubles and Chinese renminbi. Damascus and Tehran signed a deal at the end of July to activate a US$3.6bn credit facility to buy oil products with long term payment terms. Earlier, a US$1bn credit line to Damascus was extended to buy Iranian power generating products and other goods, in a barter arrangement which helped Syria export textiles and some agricultural products to the Islamic Republic. That said, Damascus is highly unlikely to succeed in stemming the increase in prices or revive the country's moribund economy as long as the civil war rages on. Indeed, we cannot exclude that the government will be forced to print money to finance expenditure over the coming quarters, a move which would only trigger further inflationary pressure.