The Central Bank of Egypt (CBE) has said that portfolio investment flows directed to emerging markets (EMs) will witness a slow and uneven recovery in favour of regions with the strongest economic recovery.
This comes as the global economy and global trade movement is expected to undergo a recovery starting from 2021.
In its financial stability report, issued on Tuesday, the CBE affirmed that the financial system has seen a high level of stability over the past few years. At the same time, the economic performance also witnessed an improvement due to the success of Egypt’s economic reform programme between 2016 and 2019.
The CBE said that the domestic financial system’s stability and the improvement of the country’s economic performance contributed to an Egyptian economy immunised against all internal and external disturbances. This has been particularly useful during the novel coronavirus (COVID-19) pandemic, when there were severe global repercussions.
Egypt’s positive domestic economic stability has also helped reduce the possibility of systemic risks affecting the financial system’s stability.
The ability of the economy and the banking sector to absorb the consequences of the coronavirus pandemic on foreign currency resources has contributed to reducing pressure on the exchange rate, the CBE report added.
It has also lowered market risks for the banking sector, alongside reduced foreign capital fluctuations. This has, in turn, strengthened financial stability without resorting to macro-prudential policy.
The CBE added that the coronavirus outbreak led to a slowdown in many economic activities, and the exit of portfolio investment flows from EMs. This came about as a result of the high level of uncertainty, and thus the positive expectations of global economic and financial conditions were reflected in negative expectations.
“The Egyptian economy was able to contain the reversal in portfolio investment flows thanks to its relatively stable sources of foreign currency, and the formation of a large net foreign currency reserve, which amounted to $45.5bn in February 2020, and enabled it to respond to the consequences of the crisis by using $5.4bn in March 2020,” the report read.
The report added that the formation of net foreign currency assets in the banking sector helped contain the sudden exit of portfolio investments, as net assets recorded inflows of $8.5bn in January to March 2020.
“The net foreign exchange reserves continued to decline in April and May to absorb foreign currency needs,” it said, “However, net international reserves rose in June 2020 to record $38.2bn due to the reversal of flows directed to emerging markets, the Egyptian government’s issuance of international bonds in May 2020, and the country’s acquisition of a loan from the International Monetary Fund (IMF).”
It also said that the banking sector’s enjoyment of high rates of local currency liquidity led to its ability to increase its share of treasury bills’ balances, in conjunction with the exit of foreign investors from the local market. This contributed to reducing the impact of foreign capital fluctuations on the returns of Treasury bills (T-bills) and sources of financing the budget deficit.
Portfolio investment flows to EMs to recover slowly in 2021: CBE
