|Tarek Amer, Egypt’s central bank governor|
Egypt’s central bank governor, Tarek Amer, unpegged the pound from the dollar in November, leading to a sharp devaluation and paving the way for a much-needed $12 billion IMF loan.
The exchange rate move is broadly positive for the country’s banks, say analysts, as it will attract inflows of capital and help close a booming black market in dollars.
Egypt’s political turmoil of recent years has led to a drop in tourism and foreign direct investment – the country’s main sources of hard foreign currency.
As foreign currency reserves fell, the central bank started rationing dollars to pay for essential imports, which led to the emergence of a black market for dollars.
Laila Sadek, a financial institutions analyst for the Middle East at Fitch, tells Euromoney: “In terms of direct effect on the banking system, we believe banks have prepared for a devaluation for some time and are well positioned to deal with it.
“Business volumes could benefit significantly from a return to growth, which should result from greater US dollar availability.”
The revaluation of the pound was a key request from the IMF, which had been considering lending to Egypt. The IMF approved a $12 billion loan to Egypt shortly after the central bank’s currency move.
But while bankers had expected the central bank to devalue the pound, few had anticipated it would allow the currency to float freely, as it did on November 3.
That caused a much more dramatic fall in value than had been expected.
The pound, which had been pegged at E£8.8 to the dollar, quickly dropped to E£18, before regaining some ground.
Rachid Kettani, CFO of Attijariwafa Bank, a Moroccan bank which is buying Barclays’ Egyptian operation, says: “We had already anticipated this devaluation and challenging economic situation, but frankly, we didn’t expect such a huge movement of the exchange rate.”
Sadek agrees that many bankers had anticipated a devaluation, but not a free float. She says that is “uncharted territory” for Egyptian banks.
She says it could cause the banks some initial pain, adding: “Capital levels may be impacted in the short term, with possibly some deterioration of asset quality.”
Renaissance Capital expects an increase in non-performing loans, as many domestic companies depend on imports and are unlikely to be able to pass on the entire cost of the devaluation to consumers. This should particularly affect the import-dependent, consumer-focused sectors.
The central bank is trying to counter some of the negative effects of the unpegging. It hiked rates by 300 basis points to stem the inflation that was likely to follow the weakening of the exchange rate.
Sadek says: “Although the new system is good news for the banking industry longer term, in order for it to work and be effective, it is crucial that the central bank holds its nerve through the volatility along the way to the stabilization of the FX market.”
Amer is aware that it will take time. In a news conference on November 3, he said: “It is going to take us around one and a half years to see changes [in the economy]. We are just fixing the foundations.”
Renaissance says there could be strong growth in lending following the unpegging, and the resulting availability of dollars. It points to the fact that 90% of loans in Egypt are short term in nature, and most of them relate to trade finance, making dollar availability a key driver of loan growth.
After Attijariwafa had agreed to buy Barclays Bank Egypt, and ahead of the currency unpegging and IMF loan agreement, Kettani told Euromoney he found the economic situation in Egypt “very difficult”, due to its low growth and foreign currency reserves. But he added: “We really believe the medium- and long-term growth prospects are interesting.”
Kettani is all the more convinced of that after the recent changes.
“We are happy with all the ongoing reforms from the government, central bank and IMF,” he says. “We recently read and heard a lot of good news after the free float, so they are achieving their initial objectives in terms of increasing their foreign currency reserves to more than $25 billion. The situation is improving.”
In a statement reacting to the central bank’s currency decision, the IMF says: “The flexible exchange rate regime, where the exchange rate is determined by market forces, will improve Egypt’s external competitiveness, support exports and tourism and attract foreign investment.”
It adds: “All of this will help foster growth, job creation and a stronger external position for the country.”