Books – Mostafa Eid and Manal Al-Masry:
Egypt attracted about $ 1.7 billion in foreign exchange flows, in just four working days, from last Wednesday to Monday evening, which contributed to strengthening the Egyptian pound against the dollar, according to the Central Bank of Egypt in an official statement yesterday.
The CBE said that the banks ’foreign exchange resources have witnessed a noticeable increase in recent days, especially from foreign exchange fund investments in the Egyptian financial markets.
Foreign exchange that enters Egypt is usually from 6 primary sources, namely exports, tourism receipts, remittances from Egyptians abroad, foreign direct investment, revenue from the Suez Canal, and finally foreign investments in financial markets, which have witnessed a marked increase in particular in recent days.
Foreign investments in financial markets and government debt instruments, called indirect foreign investment, and it is sometimes called “hot money”, as it enters the market quickly, but its danger is that it can come out quickly also with any internal or external tensions.
The large inflows from foreign investment funds in government debt instruments contributed to reducing the dollar exchange rate against the pound, as the average dollar price lost about 14 piasters until the end of trading on Monday, compared to its level on Wednesday, reaching about 15.87 pounds for purchase, and 15.97 pounds for sale .
How have these flows affected the price of the dollar in recent days?
Foreign exchange flows directly affect exchange rates by increasing liquidity of foreign currencies in banks, and each bank puts its surplus to sell to other banks through the interbank market, which increases the supply of the dollar, and thus the exchange rate decreases Who has been subject to supply and demand policy since the exchange rate liberalization in November 2016.
Foreign currency flows through foreign investments in financial markets, especially in treasury bills and bonds in the local currency, did not directly affect exchange rates, before December 5, 2018, in which the central bank’s mechanism for transferring foreign investors money began.
The investors entered to invest in debt instruments through this mechanism before its cancellation, and the central bank avoided with it a large part of the amounts entered through it in a special account, and it is not pumped into the market and therefore does not affect the exchange rate except perhaps through a small part that was entered from Through the banks.
But with the abolition of the mechanism, foreigners wishing to buy Egyptian treasury stocks, bonds, and bonds have to enter and exit through the interbank exchange market, and thus these sums have directly affected the foreign exchange supply, and thus the exchange rate with the application of the floating system.
Indeed, the price of the dollar against the pound has witnessed since the end of 2018 until now, a decline that reached about two pounds, by about 11%, and whenever there was an acceleration in the pace of decline, this coincided with statements from banking sector officials about a noticeable increase in the flows of foreign investors investing in treasury bills and bonds .
Why does Egypt attract these flows despite the recent turmoil in the region?
An official source at the central bank told Masrawy, in previous statements, last Thursday, that Egypt attracts large foreign investments in government debt instruments, despite tensions and political events in the Middle East, which supported the pound exchange rate.
And the last days witnessed military unrest in the Middle East region after the killing of the prominent Iranian military commander Qassem Soleimani in an American air strike near Baghdad airport in Iraq, which was followed by days of Iranian missile attacks on American military bases in Iraq that did not cause human casualties, but the two sides moved to calm after that. .
Egypt’s attractiveness to indirect foreign investments is mainly due to the high interest it offers to foreign investors, which brings them good returns that are not available to them in other markets.
Also, foreigners accept government debt instruments, thanks to the political stability witnessed by Egypt in recent years, the improvement of indicators of the Egyptian economy in the last period, and the reforms implemented by the government within the economic reform program in cooperation with the International Monetary Fund, which ended last November.
According to Bloomberg Agency, Mohamed Abu Pasha, an analyst at Hermes Investment Bank, said that the Egyptian pound is still attracting foreign investment thanks to the high real return.
The agency noted that the appreciation of the local currency may reflect the entry of investors to the market to take advantage of the high returns before an expected rate cut on Thursday.
Requests for Egyptian treasury bills and bonds jumped in recent auctions, reaching last Thursday alone to 85 billion pounds (about 3.5 billion dollars), according to Alan Sandeep, head of research at Naim Investment Bank.
The attractiveness of the Egyptian government debt instruments lies in the fact that the real interest it provides to foreign investors is attractive to investment, compared to its counterpart in the competing countries, as well as fears of a new rate cut during the central bank’s monetary policy committee meeting next Thursday.
The real interest is the interest rate declared by the Central Bank or paid on debt instruments minus the rate of inflation, as the low rate of inflation represents an additional advantage with higher interest.
The central bank cut interest rates by a total of 4.5% in 2019, bringing the total reduction over the past two years to 6.5%, to 12.25% for deposit, and 13.25% for lending.
However, Egyptian bonds and bonds are still providing a real high return with the significant decline in inflation rates in recent months, despite their rise last December to the level of 6.8% of the total republic and 7.1% in cities.
On Thursday, the Central Bank’s Monetary Policy Committee will discuss the fate of interest in its first meeting with its new formation, which was approved by the Central Bank’s Board of Directors, days after a Republican decision to form a new board of directors headed by Tariq Amer, the bank’s governor.
Tamer Youssef, head of the treasury sector at a private bank, told Masrawy on Sunday that the increase in demand among foreign investors to buy local debt instruments is due to their desire to obtain a high interest rate before the meeting of the Monetary Policy Committee next Thursday, which some analysts and bankers expect to Interest rates are reduced.
On Sunday, the central bank sold treasury bills worth 16 billion pounds for 3 months and 9 months, after receiving orders exceeding 51 billion pounds during the bid, which saw a decrease in the interest rate.
Central bank data published on its website on Sunday revealed that the interest rate on the treasury bills bid fell today by a rate ranging between 0.255% and 0.275%.
Interest fell to 14.548% on bills for a period of 91 days (3 months), compared to 14.823% in the previous bid, and interest decreased to 14.572% on treasury bills for a period of 266 days (for a period of 9 months) instead of 14.827% in the previous bid.
Current account and tourism revenue are catalysts
According to Bloomberg, Hermes investment bank said that the decline in the current account deficit and the increase in tourism revenues add to the increase in the attractiveness of the local currency, and support the positive view of the Egyptian pound.
The current account deficit declined by $ 629.8 million, to be limited to about $ 1.4 billion during the first quarter of 2019-2020, compared to $ 2 billion in the corresponding period of last year, according to central bank data.
Egypt’s revenues from tourism increased during the first quarter of 2019-2020 by 6.7%, to record about 4.2 billion dollars, compared to about 3.9 billion pounds in the same period of the previous year, which is considered the highest quarterly revenue in the history of tourism in Egypt, and the first time that it exceeds the level of The 4 billion dollars, according to Masrawy’s analysis of the central’s data.
Is the dollar continues to decline?
Societe Generale Bank expects the pound to increase by 3.7% during the year 2020, bringing the price of the dollar at the end of the year to the level of 15.35 pounds.
But Alan Sandeep linked this to the way of paying Egypt’s obligations from foreign debt, as Gulf deposits and facilities are likely to be renewed from these obligations, which may further strengthen the pound, or keep it at the level of 15.75 pounds for the dollar.