Egypt’s foreign currency inflows rise, investors still need reassurance

 01 Feb 2017 - 19:30

Egypt’s foreign currency inflows rise, investors still need reassurance
A customer exchanges US dollars to Egyptian pounds in a foreign exchange office in central Cairo, November 3, 2016 (REUTERS / Mohamed Abd El Ghany)

By Asma Alsharif / Reuters

CAIRO: An inflow of $9 billion into Egyptian banks since the country’s central bank floated its currency shows confidence in the economy is returning, but bankers and economists say investors need reassurance to attract higher volumes.

The central bank raised interest rates by 3 percent and abandoned its currency peg of 8.8 pounds per dollar on Nov. 3, causing the pound to halve in value. It hoped to unlock foreign currency inflows and end a black market for dollars that had sucked away foreign currency from the banking system.

“This surpassed my expectations, but I think the flows might normalize going forward, because there usually is a very positive trend in the few weeks following the flotation and then it naturally slows down,” said Hany Farahat, senior economist at CI Capital.

“Investors are still not 100 percent certain or assured that we passed this challenge. When investors pour money into Egypt today they do consider the risk that it might be stuck and they can’t get it out,” he said.

Egypt’s currency peg and a decline in foreign investment and tourism after a 2011 uprising drained the central bank’s foreign reserves, forcing it to ration dollars and impose capital controls before the flotation.

Some of their controls have since been loosened, but it still has a cap on deposits for importers of non-essential goods and a cap on outgoing wire transfers.

Banks have been giving priority to importers of essential goods, followed by other importers and companies seeking to repatriate profits. But many say that they still don’t have enough hard currency to cover all their clients’ demands.

“In three months, the central bank used to sell around $1.5 billion, and now banks have got $9 billion without the central bank touching its reserves. This is very good news. We feel the difference but still demand is higher than supply,” one banker said.

“The problem is now with the backlog, estimated between $7 billion to $9 billion. How will that be addressed? There is constantly new requests for dollars that keep piling up on a daily basis and need to be addressed,” he said.

Foreign currency flows have also been boosted after Egypt signed a $12 billion, three-year loan programme with the International Monetary Fund. The programme calls for aggressive economic reforms, including energy price increases and the introduction of a value-added tax.

Bankers are now sold 10 times the amount of foreign currency that they got from clients before the flotation and the IMF deal was signed in November.

Foreign investment in Egyptian treasuries more than quadrupled to around $500 million by the end of December, drawn by high yields. They remain far below the pre-2011 level of near $11 billion.

“I think we are talking about at least $7 billion by the end of this year if the issue of money transfer is behind us. But if nothing happens on that front, then I think progress will be much lower,” Farahat said.

Egypt’s Finance Minister said last month that he expected foreign investment in Egyptian treasuries to reach $10 billion to $11 billion in about one year.

The central bank’s foreign reserves rose to $24 billion in December compared with $19 billion in October, before the central bank floated its currency. They are expected to rise further after a $4 billion Eurobond was issued last week.

The Eurobond sale raised twice as much as it initially targeted and at lower yields than expected.

(Reporting by Asma Alsharif, editing by Larry King)