Egypt .. Are banks suffering from a cash liquidity crisis?

Cairo- Recently, fears have been raised that banks in Egypt may face a cash liquidity crisis accompanied by questions about the causes and nature of this controversial crisis, especially after the Central Bank of Egypt recently expressed its willingness to provide emergency liquidity to local banks if the need arises, but with specific and costly terms and controls.

These fears were reinforced by the issuance of a report by the “Fitch” credit rating agency, days after the Central Bank of Egypt’s decision, warning that Egyptian banks may face pressure if “foreign” assets continue to decline and there is a renewed wave of selling by portfolio investors. Foreign currencies due to high inflation (which reduces their gains), and the tendency of the US Federal Reserve to raise interest rates several times.

The annual inflation rate was recorded at 6.5% last December, and this figure is likely to rise to between 7% and 7.9%, according to a survey conducted by the “Al-Sharq” economic website in several local investment banks.

The Central Bank of Egypt had announced – through a statement on the tenth of this month – that it had agreed to a set of rules that will allow it to provide emergency liquidity to local banks, when they are unable to provide it from the interbank market or from other financial markets.

But he stressed this mechanism, as he stressed that liquidity will be available to banks with solvency only for a maximum period of 180 days, and financing or part of it can be extended for other periods, indicating that the interest rate for emergency liquidity will be determined at the central bank’s overnight lending rate, plus a margin determined by it. Bank minimum 5%.

President Abdel Fattah El-Sisi called on Egyptians at the end of last year – on the sidelines of a celebration he held in the new city of Aswan (south) – to “place their savings of money in banks instead of investing them in real estate”, claiming to allow the state to build more housing units in the new cities.

Foreign investments in Egyptian treasury bills in the local currency fell to $22.061 billion last October, compared to $24 billion at the end of last September, a decrease of about $1.9 billion, the lowest level since April 2021.

Despite the pressures on foreign assets in Egyptian banks, there are positive indicators that indicate the stability of the financial situation, such as:

  • The foreign exchange reserves of the Central Bank gradually increased to about 40.9 billion dollars at the end of last December.
  • The rise in domestic liquidity in the banking sector to 5.74 trillion pounds (a dollar equals approximately 15.7 Egyptian pounds) by the end of last November, an increase of 89 billion pounds.
  • The growth rate is expected to reach 5.7% in the current fiscal year 2021-2022.
  • Extending the life of the debt to approach 5 years in the medium term instead of 3.4 years currently.
  • Targeting new instruments such as sukuk, sustainable development bonds, and green bonds to attract additional liquidity.

On the other hand, some economic data paint a negative picture that may affect the flow of foreign investments, such as:

  • The increase in the value of Egypt’s external debt by the end of the third quarter of 2021 to about 137.9 billion dollars.
  • Inflation is expected to continue to rise more than 7% in 2022.
  • The US Federal Reserve has raised interest rates about 4 times this year, and the hot money has migrated there.
  • Egypt’s current account deficit jumped by 64% to $18.4 billion in 2020-2021.
  • Continuing decline in foreign assets in local banks.

The race to raise interest rates and cling to investors

In the context of his comment, Sherif Othman, a financial expert at the Washington Analytica Foundation, said in the American capital, Washington, that “there are no confirmed indications about the existence of a liquidity crisis at the present time, and the central bank’s step is a proactive measure in anticipation of any expected crisis as a result of the US Federal Reserve’s direction to raise interest rates to confront inflation.”

Othman expected – in statements to Al-Jazeera Net – that the Central Bank of Egypt would raise interest rates; Because raising interest rates in the United States will attract him to part of the capital in emerging markets, including Egypt, and therefore he must defend against losing that (hot) money despite its risks.

Regarding the concerns raised about the fate of depositors’ money, the financial expert confirmed that the Central Bank of Egypt guarantees these funds and has strict monetary policies in this regard, in addition to its willingness to support banks in case they need some liquidity even if they are forced to print money, but its effects will be negative on inflation. and the value of the pound.

Investors caution and government reassurances

The Egyptian government’s assurances did not prevent some foreign investors from being cautious in the future, according to Reuters, which recently published a report that indicated that some foreign investors are cautious about buying local Egyptian treasury bills, due to concerns related to emerging markets and the sustainability of high Egyptian returns.

Victor Szabo, a conservative director at Britain’s Aberdeen, says the problem is not whether money will be smuggled out of Egypt, but rather how Egypt will meet its large financing needs in the future.

“The main question is whether they are willing and able (the Egyptian government) to maintain the exchange rate, because that’s why it’s the most sensitive trade for emerging markets, because they keep the exchange rate stable and they pay very high yields on their bonds,” he added.

Some countries witnessed a significant decline in their local currency against the dollar, ranging between 10% and 30%, but the Central Bank of Egypt maintained the value of the pound at the level of 15.7 pounds to the dollar throughout the past year, in addition to high interest rates so that foreign investors do not lose their money upon exit.

The Governor of the Central Bank of Egypt, Tarek Amer, believes that the depreciation of the exchange rate will not bring tourists or increase exports, and may even cost investors out of local debt instruments. And he admitted – in his speech at a video conference of central banks in the Middle East – to intervene to maintain the exchange rate by resorting to the monetary reserve.

The Governor of the Central Bank agreed to intervene to maintain the exchange rate of the Egyptian pound by resorting to the monetary reserve (Al-Jazeera)

The crisis is in the dollar, not the pound

For his part, Mustafa Shaheen, an economics teacher at the American Academy of Auckland, ruled out that the liquidity crisis is related to the Egyptian pound, saying, “I do not imagine that there will be a liquidity crisis in the Egyptian pound, because there are more than 5 trillion pounds in banks, but the crisis is related to foreign currencies.”

And Shaheen indicated – in his speech to Al-Jazeera Net – that “Egypt’s borrowing of $3 billion from Gulf banks last week should be placed in the context that there is a dollar crisis due to the depletion of reserves in Egyptian banks.”

The economist expressed his expectation that the Central Bank of Egypt would not float the pound again for the main reason that it has a relatively high foreign currency reserve, through which it can cover any emergency liquidity deficit, preserve foreign investors within local debt instruments, and control inflation.

What is the true value of the Egyptian pound?

In conjunction with talking about the crisis of the shortage of foreign assets in Egyptian banks, the chief economist of the Institute of International Finance, Robin Brooks, published on Twitter (Twitter), again, a tweet in which he stressed that the exchange rate of the pound is overvalued, and that the challenge now is that the pound has returned to High levels prior to 2016 (the year of the pound flotation).

Brooks had sparked controversy after his tweet in March of last year, in which he indicated that Egypt may have to devalue the Egyptian pound again. He built his theory at the time that the rise in the US interest rate would attract foreign investors’ money from emerging markets, including Egypt, and coincide with the continued worsening of the payments deficit.

Many of the heads of local banks in Egypt are betting on the strength of the banking sector, and in this regard, the Chairman of the Board of Directors of Banque Misr, Mohamed El-Etreby, stressed that Egyptian banks are in a strong position in terms of all financial indicators, including cash flow.

He pointed out – in press statements, in response to the “Fitch” report – that the central bank’s decision on emergency liquidity is a regulatory measure followed by global central banks as a future hedge, and as a support for solvent operating banks as a reserve.

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