The Central Bank of Egypt (CBE) revealed that capital inflows to emerging markets (EMs) have been gradually returning since May 2020, after witnessing a sharp exit in March 2020.
The previous capital exit, which has been attributed to the novel coronavirus (COVID-19) pandemic and the global measures associated with it, was the most violent since the 2008 global financial crisis.
In its monetary policy report issued on Tuesday, the CBE clarified that the return of capital flows to EMs was mainly supported by the improvement in global financial conditions. This comes off the back of the global economic measures against the pandemic, despite the continuing economic uncertainty.
According to the report, the global economic trade activity between Egypt and its trading partners has likely shrunk in volume, to record a negative growth rate of -2.2% during the first quarter (Q1) of 2020. This decline has occurred for the first time since Q3 of 2009, mainly due to the coronavirus pandemic.
Economic activity contracted in developed countries, to record a negative growth rate of -2.3% during Q1 of 2020, compared to a positive rate of 1.2% during Q4 of 2019, the report noted.
The CBE said that this was mainly supported by the contraction of economic activity in the Eurozone area, the UK, and Japan during Q1 of 2020.
Economic activity also contracted in emerging countries to record a negative growth rate of -2.0% during Q1 of 2019. This was mainly supported by the large contraction in economic activity in China, which was partially limited by India and Russia recording positive growth rates during the same period.
In the same context, the CBE pointed out that Egypt’s monetary and fiscal stimulus policies and structural reforms have alleviated the consequences of the global pandemic on the neediest classes. These same policies are also likely to provide the support needed for economic activity to recover once the pandemic is contained.
The CBE pointed to the decline in Egypt’s international bond yields since May 2020, after their noticeable rise in March and April. The downturn is in line with developments in emerging markets, with Egypt’s sovereign credit risk swap margin also relatively low compared to the majority of countries with similar sovereign credit ratings to Egypt.
Locally, the CBE revealed that the dollarization rate of total bank deposits continued during Q2 of 2020. At the same time, the weighted return rate on new loans decreased to 11.7% in June 2020, compared to an average of 15.1% during December 2019 to February 2020. The decline in the weighted rate of return on relatively new deposits amounted to 9.4% in June 2020, compared to an average of 9.5% in December 2019 to February 2020.