Egypt’s foreign exchange reserves erode after financial implications of coronavirus

Fitch, the global credit rating agency, has said that Egypt’s foreign exchange reserves have begun to erode due to the financial implications of the novel coronavirus (COVID 19), which may cause a new wave of the Egyptian pound’s decline against the US dollar. Bankers and businessmen have confirmed that a small black market for the Egyptian pound has reappeared in the past few days because of the spread of COVID-19. Bankers revealed that informal transactions took place at the price of EGP 16.15 per $1, compared to EGP 15.75 at exchange offices and banks. The rise of the dollar coincides with the issuance of official data showing that the central bank continued printing billions of pounds to reach about EGP 64.6 billion ($4.1 billion) during the period from December 2018 to the end of December 2019. This brings the total of what has been printed since General Abdel Fattah al-Sisi came to power in mid-2014, to about EGP 254.9 billion ($16.2 billion). Governmental banks also raised interest rates in large proportions on savings certificates, in an attempt to attract liquid money, while they had successively reduced them during the months before the emergence of the widespread virus.

Fitch said in a report on Monday that the corona shock will affect Egypt’s external finance, its gross domestic product (GDP) growth, and the country’s financial performance. Egypt has officially registered 366 cases of the respiratory disease caused by the virus, including 19 deaths, according to the Ministry of Health on Monday, while Canadian researchers say the true figures are much higher than the declared figures. Fitch pointed out that the disruption of the tourism sector, and the possibility of affected exports, will sharply affect public finances: “Recovery needs time to return to pre-crisis levels.” Last week the Egyptian government suspended all commercial flights in an effort to contain the outbreak, in a devastating step for the tourism sector that generated the country $12.5 billion in 2019. The global credit rating agency estimates these revenues at four per cent of GDP in 2019, adding that weak international demand for goods will also reduce Egyptian exports, whose revenues reached about $17 billion last year. The decline in global trade levels also affected the income of the Suez Canal, as Egyptian media reports confirmed that the number of container ships passing through the Suez Canal fell 7.3 per cent in February. The decline in revenues from the passage of international ships in the Suez Canal, which amounted to $5.8 billion last year, means that a second important foreign exchange resource for Egypt will be affected. “Foreign transfers of $25 billion annually can also be affected, and any growth in domestic demand will not be sufficient to prevent a significant expansion of the current account deficit in general,” Fitch said.

Economists assert that active trading in Egyptian treasury bills to benefit from interest rate differentials has slowed in the past few weeks, with foreign investors withdrawing dollars from Egypt. The agency warned that a global outbreak of the coronavirus would threaten further outflows over the next six months. Foreign investors were holding $20 billion of Egyptian treasury bills denominated in the Egyptian pound at the end of February, according to Fitch. But despite this, and with foreign currency reserves amounting to $45.51 billion at the end of February, Egypt has in its coffers enough to support the currency, which has lost little of its value in the official market since the outbreak of the epidemic compared to the currencies of other emerging market countries such as Russia, Turkey, and South Africa. But it is expected that the current account deficit during the current year, along with the exit of foreign investments, will put pressure on Egypt’s international currency reserves. The real problem is that most of the foreign cash reserves are debts and deposits due mostly to the countries of Saudi Arabia, the United Arab Emirates and Kuwait, which provided generous support to Egypt in the wake of the ouster of the elected President Mohamed Morsi on July 3 2013. Because of the expected fall in government revenues and the suspension of external lending sources, according to analysts, the government has no choice but to borrow from local banks to manage their financial needs. In preparation for this step, banks have again started to raise interest rates on investment certificates in order to attract customers with medium-sized financial sheets and above. In another step to stave off dollarisation, the central bank informed commercial banks on Monday they were reducing interest rates on dollar deposits to one percentage point above the London Interbank Offered Rate (LIBOR) instead of 1.5 percentage points before that.