Egypt to end dollar-guarantee mechanism for foreign investors
CAIRO: Egypt’s central bank (CB) said it would end on Dec.4 the use of a mechanism guaranteeing that foreign investors wanting to sell out of Egyptian securities could pull out their money in dollars, in a move to loosen its grip on investment flows.
Egypt put the mechanism in place in March 2013 to ensure foreign investors would have access to foreign currency when they chose to withdraw from local securities. But analysts said its continued use had distorted the market.
Hany Farahat, senior economist at Egyptian investment bank CI Capital, said the decision was a positive step.
“There is a supply/demand distortion that has been resolved by cancelling the repatriation mechanism. The ring-fenced inflows of portfolio investors are actually now going to reflect on the interbank market and on banks’ net foreign assets,” he said.
“Adding the supply side of the foreign currency, the amount of money that used to come in via portfolio flows is going to be Egp-supported, so it will help the exchange rate and will allow more volatility,” Farahat added.
The central bank said in a statement that the decision covers “any fresh foreign currency portfolio investments wishing to enter the local currency Egyptian T-bills, T-bonds market and stocks listed on the Egyptian Stock Exchange”.
The move takes effect at the close of business on Dec.4, it said. It also said investors who entered the market via the mechanism before Dec.4 could still leave using it at any time.
The mechanism “was heavily utilised by foreign investors at the initiation of the liberalisation in order to guarantee liquidity”, the central bank said.
Egypt floated its currency in November 2016 and implemented several economic reforms as part of a $12 billion loan deal with the IMF.
“Two years from that date, this regime has led to the successful elimination of all foreign exchange shortages that previously disrupted economic activity,” the central bank said. It said Egypt’s foreign currency capital inflows since Nov.3, 2016 had reached a total of $111 billion and that the current account deficit had narrowed from 5.9 per cent of gross domestic product in fiscal 2015/2016 to 2.4 per cent in 2017-18.
Egypt’s central bank has enlisted the help of state-owned commercial banks to keep the Egyptian pound from weakening against the dollar by getting them to supply any extra hard currency the market may need, bankers and economists say.
The pound has held steady in a narrow band of 17.78-17.98 to the dollar over the last six months even as foreign investors have fled emerging markets around the world, including Egypt’s.
The central bank is not able to support the currency directly. In 2016 it abandoned an expensive campaign to support the pound, letting it float freely under reforms that persuaded the International Monetary Fund to lend Egypt $12 billion.
Some major emerging economies such as China or India use stateowned banks to step in and help smooth currency movements when markets are under pressure.
But these countries allow considerable movement in exchange rates, whereas Egypt has been holding its exchange rate steady.
The impact of the policy can be seen in a sharp decline in the net foreign assets of the commercial banking system, which plunged by $8.5 billion in the six months to the end of September to $12.2 billion.
Economists say there is no immediate threat to the financial system. Foreign reserves are at an all-time high of $44.5 billion, remittances from Egyptians abroad rose to a record $26.5 billion in the year to June, and a black market in dollars has disappeared.
All this suggests Egypt may be able to resist pressure on the pound for many more months or even years. Requests by bank customers for foreign currency are being met through the interbank market without major delays, bank treasury officials and other senior bankers say.