Egypt's net international reserves (NIR) are down by $5.4 billion because of the coronavirus crisis. This is the first time in 14 months that the NIR have decreased, as they had previously been constantly on the rise due to improving economic conditions. The Central Bank of Egypt (CBE) stated that it “has utilised $5.4 billion from NIR balances during March 2020 to partially cover foreign portfolio investment outflows through the CBE's foreign-exchange repatriation mechanism and accommodate for the domestic market's foreign currency needs to import strategic goods, as well as for the repayment of external debt service and obligations.” However, it affirmed that “the current NIR position remains strong as it covers around eight months of Egypt's imports.” Going forward, the worst of capital outflows could also be over, hoped Mohamed Abu Basha, deputy head of research at EFG Hermes, an investment bank. He said outflows would now take place at a much slower pace, not equivalent to the billions that took off in March, and foresaw Egypt losing only another $1 billion of its NIR due to foreign investors' backing off from investing in Egyptian treasury bills. Over the past couple of years, and with the implementation of Egypt's economic reform programme, the country's reserves have been constantly on the rise, exceeding $45 billion for the first time. According to the CBE statement, the reserves have been a key pillar of the stability of the Egyptian economy and its ability to withstand global challenges. Egypt's NIR have enabled the country to provide the liquidity needed to finance national mega-projects and developments in the agricultural, industrial, and service sectors, leading to the creation of solid support for domestic production, it said. And while the grinding to a halt of tourism and of expatriate remittances likely to be affected by the global recession will negatively affect reserves, Abu Basha said such negative effects could be balanced out by the drop in outbound tourism and lower imports. The plummeting prices of petroleum would also lower the cost of imports, he noted. Egypt's foreign-currency reserves are replenished by hard-currency earners such as tourism, remittances, and Suez Canal revenues and export earnings. Abu Basha noted that since late March foreign investors have been pulling out from the debt market at a much slower pace, even with a one per cent drop in yields, which was a good sign. On another positive note, banking expert Hani Abul-Fotouh said that according to international standards, Egypt's NIR were safe. Typically, central banks keep the equivalent of three months of imports in foreign currency, while Egypt has enough for eight months, he explained. The CBE governor had been quoted as saying that Egypt needs $25 billion in foreign currency to cover its obligations without experiencing any pressure. The NIR are an indication of a country's ability to pay its foreign debts, maintain the value of the local currency, and secure imports. The NIR are a key factor in a country's credit rating as well. This means that the current decrease in the NIR means they are being used for what they were reserved for and not that they are being wasted, Abul-Fotouh explained. HC Securities and Investment, an investment bank, expects a pullout of capital from the Egyptian treasury worth $6 billion in the second half of fiscal year 2019-20. Currently, it said, Egyptian transfers from abroad represent 8.8 per cent of the country's GDP, and these transfers helped to cover 13 per cent of the current account deficit in the first half of the present fiscal year. Egyptian transfers from abroad are expected to record $25.1 billion by the end of this fiscal year, a 10 per cent decrease on an annual basis in the second half of 2019-20, in comparison to eight per cent in 2008-09 during the global financial crisis and 13 per cent in 2015-16 on the back of expectations of the depreciation of the pound before it was floated in November 2016, HC Securities added. The decrease in Egyptian transfers from abroad will affect the country's NIR, said Abu Basha, adding that no exact estimate could be made as yet, however. He said the repercussions of the coronavirus would vary according to the effects of the pandemic on the Gulf and other economies. As far as tourism is concerned, HC Securities said Egypt would not receive revenues from tourism after the first week of March. It anticipated a 60 per cent decline in revenues from tourism in the fourth quarter of the current fiscal year, translating to a 16 per cent drop in revenues from tourism on an annual basis to reach $10.6 billion in 2019-20 and down from $13.4 billion. Monette Doss, a macroeconomic and banking analyst with HC Securities, said that plummeting oil prices would also negatively affect the trade balance for petroleum in Egypt. “With Brent oil registering $27 per barrel in the trade balance, the country will record a trade deficit of $96 million in 2019-20, compared to previous expectations for a break-even point… Moreover, because most foreign direct investment (FDI) inflows are concentrated in the oil and gas sector, and despite the new concessions granted, we expect the value of FDIs to drop by nearly seven per cent year-on-year in the second half of the fiscal year to reach $3.8 billion,” she added. Meanwhile, Egypt is seeing a return of the foreign-currency black market. “Some unofficial trades were taking place at LE16.15 to the dollar, compared to the LE15.75 offered by currency exchange bureaus and banks,” Reuters reported businessmen and bankers as saying. “Naeem Brokerage said in a note on Monday that the dollar was trading at LE16.10-LE16.15 in the parallel market, but that trade was very thin as importers were postponing orders,” Reuters said. “Banks have begun rationing their foreign-exchange inventories (prioritising the imports of necessities), adjusting to the drop in inflows from tourism and hot money outflows,” Naeem was quoted as saying in the Reuters report. “With interbank [foreign exchange] liquidity expected to dry up further in the coming months, we expect the [Central Bank] to intermittently plug the deficit by selling dollars to the banks,” Naeem was quoted as adding. On Monday, the CBE told the banks to cut their interest rates on dollars to one per cent. The move aims to control the exchange market and deter dollarisation after the CBE decreased key interest rates by 300 basis points, a banker at a state-owned bank told Reuters. The National Bank of Egypt has reduced the return on dollar deposits on savings certificates in dollars paid in advance for three years to 1.25 per cent, down from three per cent; to 1.35 per cent, down from 3.75 per cent, for five-year certificates; and to 1.5 per cent, down from 3.75 per cent for a new three-year gold certificate, the banker told Reuters. Financial markets expert Hani Tawfik said the price of the dollar should be a reflection of its real value and that it should have appreciated against the pound to reach LE16 or LE16.5. The withdrawal of foreign investors from the debt market would have been reflected in the value of the pound, he said. Tawfik said it would be a mistake for the CBE to prop up the pound, noting that some foreign reports have said that the central banks of Egypt, Turkey and Ukraine have supported their domestic currencies against the dollar. The dollar was trading at LE15.69 for buying and LE15.79 for selling on Tuesday morning. Tawfik expected the dollar to appreciate against the pound in the light of Egypt's lack of foreign-currency revenues on the back of the stoppage in tourism, the drop in Egyptian monetary transfers from abroad, the fall in Suez Canal revenues and in foreign investments.
*A version of this article appears in print in the 16 April, 2020 edition of Al-Ahram Weekly
