Egypt tax change seen boosting bank lending
“The strong outflow of foreign capital in the T-bill market may now slow, however, or potentially reverse if rates on T-bills were now to be pushed back upwards, which in turn would make the carry trade more attractive,” the note added.
Foreign investors cut their holdings in Egyptian treasury bills and bonds by $8 billion in the six months ending September to $13 billion, part of a global exit from emerging market debt.
A separate decision by the central bank last week that will end guarantees of foreign currency for investors exiting the government securities market may, however, make Egyptian treasuries less attractive.
The “repatriation mechanism,” which will end on Dec. 4, was put in place in March 2013 when confidence in Egypt’s ability to provide foreign currency was cutting into investment inflows.
Economists say the mechanism’s removal will lead overseas investors to channel funds through the banking system instead of the central bank, making banks more liquid in foreign currency but also potentially making the exchange rate more volatile.
Still, it is uncertain how much leverage banks have with the Fi- nance Ministry to push up Treasury yields to offset higher tax bills.
“It’s a symbiotic relationship, they both need each other,” said Wael Ziada, head of investment company Zilla Capital.
Banks have been lobbying the government to water down the tax proposal, which Arqaam Capital and investment bank Pharos Holding said could slash the sector’s earnings by 23 percent.