Banks Federation head urges caution as hot money flows into Egypt after flotation, rate hike

Ahram Online , Sunday 10 Mar 2024

Head of Egypt’s Banks Federation Mohamed El-Etreby urged caution amid an influx of hard currency into Egypt in the form of hot money following the flotation of the Egyptian pound and an increase in interest rates.

dollars
An employee counts U.S. dollars in a foreign exchange office in central Cairo, Egypt. AFP

 

Last week, the Central Bank of Egypt (CBE) floated the pound against the dollar in the fourth devaluation of the local currency since early 2022.

The pound lost nearly 60 percent of its value recording approximately EGP 49.4, from its previous value of around EGP 30.9, against the US dollar.

In TV comments on Saturday evening, El-Etreby praised the CBE’s decision as historic, noting that its outcomes were immediately observable.

“We witnessed an influx of foreign resources into the [Egyptian] banking sector from very large institutions in numbers that no one expected,” El-Etreby, who is also chairman of state-owned Bank Misr, said.

He said the hard currency influx is a “positive” sign that means a quick return of confidence in the Egyptian economy.

However, he urged caution “because part of the recent inflows is hot money.”

In recent years, Egypt has faced economic shocks caused by the sudden exodus of hot money, which is short-term, high-interest-rate investment certificates.

An estimated $20 billion in hot money left Egypt when the Russian-Ukraine war erupted in 2022.

El-Etreby praised the recent revision of Egypt’s future outlook by credit-rating company Moody's from negative to positive, noting that this was the first time that the future outlook has jumped two steps at once, exceeding the stable level directly to the positive one.

On Thursday, Moody's revised the outlook on Egypt to positive from negative amid the CBE’s game-changing economic measures, while maintaining Egypt’s long-term foreign and local currency issuer ratings at Caa1.

Under Moody’s assessment, Caa1 is a “very high credit risk” bracket that indicates “poor standing and the vulnerability to very high credit risk.”

Over the past months, Egypt struggled with a hard currency crunch, leading to a steep fluctuation in the exchange rates between the official and the parallel markets.

The CBE said one of the main objectives of the pound flotation is to unify the exchange rates and eliminate parallel markets.

On Saturday, Egyptian President Abdel-Fattah El-Sisi said the large influx of hard currency – mainly from the Ras El-Hekma investment project and an expanded IMF loan – made adopting a flexible exchange rate possible.

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