Egypt to end dol­lar-guar­an­tee mech­a­nism for for­eign in­vestors

The Gulf Today - Business - - REGION -

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.

LIQ­UID­ITY GUAR­AN­TEE

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.

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