Egypt is a haven market for traders: Bloomberg
CAIRO – 17 August 2018: In light of volatile economies the world faces nowadays, Bloomberg reviewed the Egyptian economy in a report, referring to it as the traders’ refuge from volatility.
The report reviewed the economic measures Egypt took during the last period and how they kept the economy stable compared to other developing countries.
“Egypt has transformed into a haven for debt investors from a crisis zone in less than two years,” Bloomberg said.
The Egyptian Currency
Bloomberg said that the devaluated Egyptian pound was insusceptible to the plummet that faced Turkish and Argentine currencies, leaving them at low records.
It commented that Egypt’s pound has barely moved in the past four months.
“The pound also held its own even as Egyptian Treasury bills suffered outflows of at least $4 billion since March,” it said.
The tough measures Egypt took to stabilize the economy are paying off the debt market, according to the report, resulted in raising the country’ credit rating by S&P Global Ratings in May.
“While a recent sell-off in the country’s debt may have irked some investors, others, including TCW Group Inc. and Union Investment Privatfonds GmbH., find the currency’s stability and its relatively high yields attractive,” it added.
Despite the outflows, “we are encouraged that there were no reports of dollar shortages,” said Brett Rowley, the Los Angeles-based managing director for emerging markets at TCW.
In a response to the flow cut of dollar in the back of 25th revolution, Egypt resorted to liberalize its currency in November 2016 as part of an International Monetary Fund deal for a $12 billion loan to support its recovery and end the hard-currency crunch.
In November 2016, the Executive Board of the IMF approved a $12 billion loan as a financial assistance for Egypt to support the Egyptian economic reform program.
Upon the board's approval in November, Egypt floated its currency, losing around 50 percent of its value as part of the economic reform program which imposed taxes, including the value-added tax (VAT), and cut energy subsidies, all with the aim of trimming the budget deficit.
While the pound lost half its value after the float, a central-bank mechanism that guarantees investors’ ability to take money out of the country has limited the currency’s fluctuations, the IMF said in an email response to Bloomberg’s questions. That’s because when investors bring in hard currency, the central bank keeps the money in a special account, and then sells the cash back to foreigners on their way out.
According to IMF, Strong growth in inflows from tourism and remittances have also helped offset fund outflows in recent months, expecting the Central Bank of Egypt to keep the interest rates at 16.75 percent during August.
In the period from July 2017 to April 2018, remittances jumped 48.2 percent year-on-year to reach a record of $26 billion, compared to $17.5 billion in the same period of the previous year, CBE data showed earlier.
On Thursday, the Monetary Policy Committee (MPC) of CBE kept interest rates unchanged Thursday for the third time this year, setting the overnight deposit rate and the overnight lending rate at 16.75 percent and 17.75 percent, respectively.
“The government will, in my opinion, stick with orthodox policies,” said Shahzad Hasan, an emerging-market debt manager at Allianz in London. “That means overall capital inflows should hold up well.”
Bloomberg said that Egypt’s current-account deficit for the July 2017 to March 2018 period narrowed 58 percent to $5.3 billion as remittances from Egyptian expatriates and tourism receipts rose by over 40 percent to about $27 billion.
The Repatriation Mechanism
According to three people familiar with the matter, who asked to be unanimous, CBE raised the cost of using the mechanism last year, pushing more investors to exit using the open market and boosting demand for dollars.
They clarified that the solid supply of hard currency in the inter-bank market helped keep the pound stable over the past few months as investors sought to exit.
“The repatriation mechanism still shields the pound from sharp fluctuations, even though raising its cost is the reason why the pound has started witnessing more volatility,” said Mohamed Abu Basha, director of macro analysis at investment bank EFG-Hermes in Cairo.
The report displayed that the Egyptian currency witnessed its highest volatility period in May for 10 days, recording a decline of 1.3 percent, noting that it’s the most decrease since the devaluation.
As per Treasury Bills, Bloomberg noted that despite the drop in overseas debt in May, the pound remained relatively stable.
The effect of the devaluation and inflation
According to Bloomberg, the liberalization of the pound caused a price shock to the country as it relies heavily on imports, resulted in a 30-percent inflation for a much of last year.
It also added that the annual core inflation reached 8.54 percent in July, recording its lowest level since March 2016.
The Central Agency for Public Mobilization and Statistics (CAPMAS) announced that Egypt’s annual consumer price inflation slipped to 13 percent in July 2018, compared to 34.2 percent in the same month of 2017.
On a monthly basis, inflation increased 2.5 percent in July, compared to the previous month, to record 289.9 points, CAPMAS stated.
Moreover, CBE said that Egypt’s annual core inflation rate declined to 8.54 percent in July 2018 from 10.9 percent in June 2018, according to a report.
On a monthly basis, core inflation recorded 0.6 percent in July 2018, compared to 1.6 percent in June.
Core inflation discounts or strips out certain categories that are considered more volatile.
Fitch Ratings, which has a positive outlook on the African nation’s debt rating, is forecasting a smaller current-account deficit through 2020, Bloomberg stated.
Egypt’s current account deficit for the third quarter of the 2017/18 fiscal year fell to $1.93 billion, compared to $3.1 billion a year earlier as tourism revenues rose to $2.27 billion in the quarter.
On August 6, Fitch affirmed Egypt’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B' with a Positive Outlook, attributing the ratings to the progress in executing an economic and fiscal reform program, greater macroeconomic stability and improving external finances.
The report also stated that Foreign-currency reserves have rebounded to more than $44 billion, from as low as $13.4 billion in March 2013.
It also referred to Egypt’s gas discoveries especially Zohr gas field which is considered to be the biggest ever found in the Mediterranean Sea.
In 2015, the Italian Company Eni discovered Zohr gas field, the biggest gas field in the Mediterranean, in the Shorouk concession, with an estimated production of 30 trillion cubic feet.
The country's total natural gas consumption is about six billion cubic feet per day, of which roughly 65 percent goes to the electricity sector.
The new discoveries are expected to turn Egypt into a net exporter of natural gas as the country is expected to halt gas imports by mid 2018.
“Egypt is a little bit over-crowded,” said Sergey Dergachev, who helps oversee about $14 billion in assets at Union Investment Privatfonds in Frankfurt. “But due to the relatively high yield and relatively stable currency, it will remain an interesting investment opportunity for emerging-market investors.”