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Wednesday, 26 October 2016

A clear prelude to devaluation as the Central Bank of Egypt tips off three to rate hike

A clear prelude to devaluation: Reuters’ Asma Alsharif and Nadia Gowely hit a homerun yesterday evening, with three bankers telling them that the Central Bank of Egypt is angling to protect their banks from the impact of a substantial interest rate hike. The sources told them “the central bank had verbally instructed them to reclassify ‘available for sale’ bonds and bills, which are tradeable on the secondary market, as ‘held to maturity.’ That would mean they do not have to mark the bonds’ value to market, protecting the banks in question from a major hike to benchmark interest rates which would decrease the capital value of the bonds and hit the overall value of bank holdings.”

In a nutshell: “‘What the central bank is doing is protecting banks from making huge losses on their portfolios, revaluation losses, which could occur if interest rates rise,’ one banker at a private sector bank said.”

<rant>As one of the smartest guys we know said last night, this is good news and bad news. The good news: This is an obvious prelude to a devaluation. It’s textbook, really: Raise rates to curb inflation. The bad news: The textbook doesn’t work in Egypt. Interest rates are not an effective means of transmission for monetary policy in a nation in which maybe one in 10 people have a bank account, the grey economy probably dwarfs the official economy, and SME credit is little more than a myth. Hiking interest rates will make borrowing more expensive for the government and push the very few SMEs able to access credit out of the marketplace. Worse, the state will likely pay more in debt service than it would have had it chosen to boost commodity subsidies or extend new cash benefits to the poor. As for corporations? Banks will still offer preferential borrowing rates to their largest clients — and those few SMEs able to borrow will face credit-card-like interest rates.</rant>

US business delegation report: The last day of the US business delegation spanned from talks on oil and gas to electricity and energy, U.S.-Egyptian relations and the Suez Canal Economic Zone. We were reminded of the potential of our gas sector and we will know by November which state-owned oil companies will IPO, thanks to Oil Minister Tarek El-Molla’s announcement. (The minister also hinted at significant onshore and offshore oil and gas discoveries expected next year.) We learned that the famous arbitration clause for the feed-in tariff has finally been worded and appeals on local arbitration will happen outside of Egypt. And Suez Canal Economic Zone Chairman Ahmed Darwish gave a vivid presentation of the prospects of investments in the Suez Canal Zone and confirmed companies will “highly likely” pay utilities in USD.

Among those speaking yesterday: Oil Minister Tarek El Molla, Deputy Energy Minister Sabah Marashly, SCA chief Darwish, and the US State Department’s David Thorne. We have full coverage of yesterday in a report here.

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