Local reports have emerged saying the coronavirus crisis will cast shadows on the local exchange rate against the US dollar, depriving the Egyptian Pound (EGP) of its successful appreciation over the last period.
Mohamed Abdel Aal, a banking expert and board member of the Suez Canal Bank, believes that the expectations of the Egyptian pound depreciation against the US dollar are groundless because they were affected with the psychological toll of Covid-19 outbreak.
Abdel Aal explains, in an interview with Daily News Egypt, if Egypt’s foreign exchange (FX) resources get affected, so will the demand of US dollar, which will balance the market.
He expects that the Egyptian pound will remain stable around EGP 15.7 per Us dollar, with a tendency to drop to EGP 16 over the next three months.
The strength of Egyptian monetary policy was clearly demonstrated in dealing with global crises the sector went through, including the coronavirus outbreak, stressing that reducing interest rates would bring many benefits to the state and various economic sectors.
– Some expect, under the current circumstances, that the Egyptian pound will gradually decline against the US dollar. What do you think about this?
These expectations were groundless because they were affected with the psychological toll of Covid-19 outbreak, marred by fear and uncertainty.
Since the floatation, the local exchange rate against the US dollar is determined by a single mechanism which is supply and demand. So we should evaluate the factors of supply and demand to define the direction of the Egyptian pound in both the short and medium term.
What is the situation of FX supply?
The traditional FX resources are Egyptian expats’ remittances, Suez Canal revenues, and tourism and export revenues. We also have untraditional resources, the most important of which is direct and indirect foreign investment.
All these resources, without exception, will be affected and the reasons are known, which means that the overall effect of supply on the exchange rate is negative.
– How flexible is the local demand? How will it alleviate the expected shortfall in the FX flows?
The demand will decrease and shrink as well. There is no more need for letters of credit for importation and no external trips like Umrah [Islamic pilgrimage] or global conferences. Therefore, the impact of demand will be positive and will balance the market.
Moreover, we should look closely at the factors that emerged recently on the local and international levels, which have a decisive impact on the exchange rate.
What are those new factors?
The first of these factors is the decrease in oil prices, and we are a country that imports about 35% of its needs. The continued decline in oil prices saves us billions of dollars.
Another factor is the state’s emergency financing packages and initiatives for all sectors, accompanied by the flexibility of the Central Bank of Egypt’s (CBE) Monetary Policy Committee in adopting a dual policy. The first is reducing interest rates in favour of pushing growth, and the second is allowing a new high-yield saving vessel for the household sector. This policy aims to maintain stability and balance of the economy and to protect it from recession, as well as to avoid any inflationary pressures.
There are more CBE’s directives that aim to support stability of the Egyptian pound without direct intervention. It reduced interest rates on variable-rate dollar-denominated certificates of deposit in all banks operating in the Egyptian market, so that they do not exceed 1% above the London Interbank Offered Rate (LIBOR) in the next three months. Moreover, the CBE set the maximum interest rate for fixed-rate dollar-dominated saving vessels at 2.5%.
It is no secret that this measure will make investment in dollar-dominated saving vessels not feasible compared to the Egyptian pound, especially with the issuance the one-year saving certificates with a monthly yield of 15%, but it reduces the demand of dollar and eliminates any possibility of dollarisation.
A third factor is the CBE’s strong FX reserves covering more than nine months of commodity imports and repayment of international loans on schedule.
– What are your expectations for the Egyptian pound price against the US dollar?
I believe the Egyptian pound will remain stable against the US dollar over the next three months, at around EGP 15.7 per US dollar, with a tendency to drop to EGP 16.
– How do you see the CBE’s surprising decision to reduce the interest rates by 3%?
This was decided in an emergency meeting, and it was the largest rate cut in the history of the CBE.
I believe that there was no room for the CBE to stand still in light of the current conditions the world is going through, and Egypt is part of it, so the CBE had to take the initiative to take precautionary measures to mitigate the possible negative effects of the coronavirus on the Egyptian economy and avoid potential deflationary pressure.
The CBE acted according to a flexible programme prepared in advance.
– What is the importance of this decision?
Reducing interests will encourage the different productive sectors to expand and obtain financing at a lower cost, thus increasing production, sales, and profits.
Bank loans to various sectors are about EGP 1.8trn, and with the 3% reduction these sectors will grow and increase profits.
Also, one of the most important advantages of the decision is the state’s budget benefiting from reducing the cost of internal debt, and easing the burden on the Ministry of Finance, especially as the size of the internal debt is over EGP 4trn. Reducing interest by this large amount will save large liquidity that can be directed to help other sectors during the pandemic.
Moreover, many segments of customers, who are funded by banks whether in cash or via plastic cards, will benefit from the rate cuts. It will also stimulate the demand for goods and services.
– What about other sectors that might be affected by the interest cuts, such as the household sector?
The savings of the household sector are always at the forefront of the attention of the banking system, as banks avoid any decline in this sector under the current circumstances. This is why we see the 15% saving certificates.
This vessel, which I like to call “the smart deposit”, has multiple goals and benefits. It was able in just five working days to attract more than EGP 29bn, a huge liquidity that could have caused inflationary pressures on commodity prices under these circumstances. This prevented the emergence of dollarization as well. It also established advanced steps in achieving financial inclusion and financial technology, as more than 70% of the purchases of these certificates was done through electronic channels.
On the other hand, the CBE also reduced the interest on its subsidised loans in the industry and mortgage finance for middle-income people initiatives. It also supported developing hotels, with reducing the interest on their loans to 8% instead of 10%. The value of these three initiatives was EGP 200bn.
I would like to emphasise the effective role of the CBE’s monetary policy, which aims to achieve growth for the various productive sectors and adopt a concessional policy of reducing interest. It also takes into account the savings of the household sector with products that correspond to the difficult conditions we are going through.