Market welcomes CBE’s decision to end foreign investors funds repatriation mechanism

Hossam Mounir
7 Min Read

The decision taken by the Central Bank of Egypt (CBE) on Thursday to end the mechanism of transferring foreign investors’ funds was welcomed by a number of bank officials and analysts.

The CBE said in a statement that new foreign investments in Egyptian government debt instruments would have to enter and exit as of 4 December 2018 through the interbank market.

Commenting on the decision, CBE Governor Tarek Amer said the it was planned since the liberalisation of the local currency exchange rate in November 2016.

Amer explained that after the foreign reserves reached a record high, and the mechanism was cancelled so the investment funds can directly go to the market.

According to Ashraf El-Kady, chairperson of the United Bank, the decision aims to regulate and control the market, in order to complete the executive policy of the decision to liberalise the exchange rate in November 2016.

He added that the liberalisation of the exchange rate and leaving the market to the mechanism of supply and demand contributed to the stability of the market, and the establishment of the real price of the dollar against the Egyptian pound, which led to the issuance of this resolution as a second stage, so that funds held at the CBE when investors entered the market can now access the market through the Interbank mechanism.

According to El-Kady, this decision will lead to a surplus of foreign currencies in the market, thus may improve the exchange rate, which would also bring in more foreign investments, especially with the announcement of Egypt’s investment map.

“The step may be unpredictable, but it is certainly measured, and will have positive reactions,” according to Mohamed Abdel Aal, a well-known banking expert.

Abdel Aal explained that the cancellation of this mechanism simply means that investors can enter and exit the market through buying and selling, and that transfers will be through banks not through the CBE, which is the case around the world.

He added that the cancellation of the mechanism was due to the absence of the reasons for its presence, where there is a steady flow of foreign exchange through the interbank market, covering the regenerating demand of foreign investors.

“According to the CBE, the volume of the hard cash inflow since the flotation has reached $111bn, which means ensuring that the needs of foreign investors when they wish to terminate or transfer their investment transactions, are met through the banks that deal with them immediately, and according to the prices determined by the immediate supply and demand,” Abdel Aal said.

He added that the cancellation of the mechanism came after the CBE confirmed that most or all of the distortions in the exchange market had been eliminated and that the exchange rate was determined only according to the mechanisms of supply and demand.

He noted that the presence of foreign exchange reserves at the CBE was enough to satisfy the import needs of Egypt for over 8 months, improve trade deficit, and achieve a surplus in the balance of payments of $2.8bn in the fiscal year 2017/18 led to reassurance and confidence that the interbank market can meet the needs of foreign investors when executing purchase and sale transactions.

Abdel Aal expects more confidence and stability in the future of the Egyptian exchange market in the coming months, and that the exchange rate will move around an average of EGP 18.

He also expected the interest rate on the pound to remain unchanged until the end of the year, with the possibility of increasing if inflation surpassed CBE’s target.

Beltone Financial also issued a report noting that terminating repatriation mechanism was in line with their expectations as stated in the strategy note “Air of Confidence: Clear Skies & Higher Visibility” issued in February 2018.

Beltone had noted that the CBE would gradually encourage foreign currency inflows via the interbank market, particularly in the absence of repatriation concerns amidst stable reserves, despite growing imports. The move allows fresh portfolio inflows directly to the banking sector and comes at a critical time where the banking sector net foreign assets (NFAs) continue to weaken, registering a deficit of $3.95bn in September, up from a deficit of $2.3bn in August.

“The move further supports our view of a stable local currency with minimal fluctuations below EGP18/USD through 2019. We positively rate the gradual phasing out of the mechanism, which succeeded in mitigating strong exchange rate fluctuations at a time of high inflationary pressures. The move supports the CBE’s commitment to a free float regime and comes in line with the IMF directives that recommended phasing out the mechanism,” Beltone said in the recent report.

They added that the CBE revised the repatriation mechanism-pricing scheme by applying a 1% entrance fee in December 2017, aiming at channeling more inflows into the banking system, following the decision to remove limits on non-essential goods imports. “Thus, we see limited impact on the fixed income market, who was prepared for this gradual removal of the mechanism, after it became more expensive and with the growing consensus among investors’ that repatriations risks diminished. The squeeze in banks NFAs’ with the outflow of foreign investors from the fixed income market who entered through the interbank, representing 36% of total inflows since the float, reflects the increasing interbank volumes in 2018.”

Moreover, Beltone pointed out that despite the wave of foreign outflows of $9.8bn from the fixed income market, they still believe Egypt provides an attractive carry trade opportunity, where we expect yields to remain stable above the 19% mark, particularly with the solid macro fundamentals and growth outlook that advocated a credit rating upgrade by S&P and Moody’s in addition to a stable currency, which trades at about 9% discount to its five-year average.

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