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Tuesday, 4 July 2017

Fitch says Egypt Banks’ FX liquidity to improve as transfer cap ends

Fitch says Egypt Banks’ FX liquidity to improve as transfer cap ends: Egypt’s removal of FX transfer limits will help to restore confidence in the economy and attract foreign investments, increasing the availability of FC and helping banks provide more lending needed by FC borrowers, particularly importers, Fitch Ratings says. “We expect a greater inflow from foreign investors now that the Central Bank of Egypt (CBE) has ended the USD 100K annual cap on the amount that account holders can transfer outside Egypt. The removal of the cap last month, a requirement of Egypt’s lending program with the IMF, should reduce foreign investors’ concerns that investments could be trapped in Egypt,” the agency said in a statement picked up by Reuters. Fitch notes that the banking sector’s FX-denominated loan-deposit ratio is still too high despite falling 3.7 bps in 1Q17, but expects these to given the weak operating environment and a falling EGP.

Other analysts, however, believe that the move to end transfer caps will add pressure to the EGP. The threat appears to come from foreign companies repatriating profits, according to Capital Economics’ Jason Tuvey. “Look at the historical moves of the EGP. You can feel the pressure is coming,” he added. “It could be the moment of truth of Egypt’s currency. Egypt’s monetary supply has been growing by about 20% per year, while GDP has hovered below 4%. That means the EGP is losing approximately 16% of its value every year,” Focus Economy said in a research note picked up by Daily News Egypt. The risks to investors posed by a floating currency, comes from the potential for investors playing the market to lose their capital, should the currency swing dramatically, according to the report. But, in the case of Egypt, the convergence of the currency’s official exchange rate and its black market rate should give investors the confidence that the worst of the fluctuations are over.”

These concerns appear to be far-fetched considering Egypt’s growing net FX reserves. A report by MENA news agency citing CBE officials claim FX inflows reached USD 54 bn since the EGP was floated back in November. The banking sector had drawn in USD 20 bn, while USD 25 bn came from foreign funding by multilateral finance institutions and other sources. Foreign investors chipped in with USD 9 bn. Investment and International Cooperation Minister Sahar Nasr told Reuters on Monday that Egypt has received USD 6.5 bn in foreign direct investment in the 9M2016-17, and expects more than USD 10 bn in the next fiscal year starting in July.

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