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Thursday, 29 November 2018

CBE to terminate forex repatriation mechanism on 4 December

The central bank is going to scrap its special foreign exchange repatriation mechanism next week: The central bank will terminate the foreign exchange repatriation mechanism for new portfolio investments starting 4 December, it said in a statement (pdf) that pointed to broadly improved macroeconomic indicators, including an improved foreign reserves position. The repatriation mechanism was in place to reassure foreign investors they could get USD out of Egypt at any point. “The decision applies on any fresh foreign currency portfolio investments wishing to enter the local currency Egyptian T-Bills, T-Bonds market and the stocks listed on the Egyptian Stock Exchange,” the statement read.

Egypt is saying it’s confident it has overcome FX shortages and that investor confidence has been restored thanks to IMF-backed economic reforms. The CBE no longer has to guarantee portfolio investments and can let the interbank market repatriation. “Two years from [the November 2016 float of the EGP], this regime has led to the successful elimination of all foreign exchange shortages that previously disrupted economic activity, thereby significantly improving Egypt’s external balances. Distortions in the domestic foreign currency market were eliminated, and the forces of supply and demand drove, and continue to drive, the process of price discovery in the foreign exchange market.”

Did you pull the trigger on a (portfolio) investment before 4 December? You’re good with the CBE’s parallel mechanism. The CBE said the decision will not apply retroactively. “This will not apply to balances held inside the mechanism before the aforementioned date. Investors that initially entered through the repatriation mechanism before December 4th 2018, close of business day, may exit through the repatriation mechanism at any time,” the CBE said.

The move will be broadly good for the FX market, says Hany Farahat, senior economist at CI Capital. “Portfolio inflows will be circulated in the interbank market, supporting banks net foreign assets and inducing a healthy volatility in the [FX exchange rate] — all positive for the forex market,” Farahat said, adding that banks have been bearing the cost of outflows.

The move will also be good for the EGP: The mechanism was keeping the EGP from reaching its full potential. “Partial ring-fencing of portfolio inflows via the mechanism was a key source of undervaluation for the EGP, in our view. It deprived the interbank market of USD 21 bn, when portfolio inflows in treasuries peaked in May, and, on our estimates, currently excludes at least USD 7 bn from the system,” Farahat said.

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