Egyptian banks’ FX liquidity “still vulnerable” — it’s going to take longer to recover from the covid-19 sell-off than from the 2018 EM Zombie Apocalypse -Fitch: The capital outflows Egypt sustained over the past several months as a result of the fallout from the covid-19 pandemic was “more severe” and the strain is likely to last longer than the emerging markets sell-off in 2018, Fitch Ratings said in a recent report. Egyptian banks’ net foreign assets (NFA) dropped to negative USD 5.3 bn to service these outflows, the report suggests. The ratings agency sees FX liquidity within the banking system as still being “vulnerable” to the swings of emerging market investor appetite and a general shortage of FX receipts because of the pandemic.

We’re getting back on our feet, but a full recovery will take time: While the USD 8 bn in funding Egypt has received from the IMF and the USD 5 bn eurobond issuance in May “have helped to ease pressure on foreign-currency (FC) liquidity in the short term … a sustainable improvement in [foreign currency] liquidity would require the return of FC receipts, which are contingent on external economic factors,” the report says. These external factors include lower international demand driving down Suez Canal receipts, as well as merchandise exports, in addition to lower remittances from Egyptian expats. The ratings agency sees Egypt’s current account deficit widening to 5.3% of GDP this year from 3.6% in 2019, “intensifying pressure on FC reserves.”

Foreign portfolio investment is starting to pick up again: Egypt has started to see a reversal of outflows as foreign central bank stimulus drives renewed risk appetite for high-yield EM debt. Foreign inflows have totalled around USD 3 bn in the past month, Al Masry Al Youm reported earlier this week, citing an unnamed banking source. Inflows have so far accelerated in July: last Thursday saw some USD 592 mn in new portfolio investment — the largest amount in a single day since the outbreak of the covid-19 pandemic in March — and Sunday saw USD 367 mn in inflows, the source said.

But a fresh wave of outflows is still a possibility: Fitch says Egypt could see a new wave of outflows if the EGP were to sustain a “sharp depreciation.” Another EM sell-off would also deliver a fresh blow to FX liquidity and banks’ NFA, as foreign holdings of t-bills represented some 20% of FX reserves at the end of April.

No cause for concern? “We are not worried as we believe the strain on foreign currency liquidity is relatively easing currently as reflected by the currency rate cooling off to around EGP 16.00 / USD from EGP 16.25 a few weeks ago,” HC Securities’ Monette Doss told Enterprise. ”We believe that at these levels Egyptian treasuries offer attractive risk-adjusted return coupled with low currency volatility which has possibly resulted in regained interest of foreign investors.”

On the upside, demand for FX has dropped considerably because of the pandemic, Suez Canal Bank board member Mohamed Abdel Aal tells us. While Egypt’s decision to close its airspace to commercial international flights caused tourism receipts to drop to zero, it also meant that Egyptians weren’t drawing FX to support international travel. The closure of the annual Hajj pilgrimage also saved the country substantial outflows, Abdel Aal says.