Is raising the central interest rate by 3% enough to return “hot money” e
Saturday, December 24, 2022
I wrote – Manal Al-Masry:
Bankers interviewed by Masrawy said that the Central Bank’s decision to suddenly raise the interest rate by 3% yesterday, Thursday, alone will not be enough to attract foreign direct investment into the Egyptian pound (through T-bills and bonds) unless after activation, future contracts that oblige the investor to cover the risk of availability Foreign liquidity and currency volatility.
The central bank surprised the market by raising interest rates by 3%, which exceeded most expectations, during the last meeting of the Monetary Policy Committee in 2022 yesterday, Thursday, to 16.25% on deposits and 17.25% on loans in order to curbed inflation (pace of price increase).
The Russian-Ukrainian crisis has caused a $22 billion outflow of indirect investment from Egypt since the beginning of this year, Egyptian Prime Minister Mustafa Madbouly said.
The outflow of those billions of dollars put a lot of pressure on the Egyptian pound, which then caused its price to fall against the dollar and other foreign currencies.
And the policy of the central bank during the last 6 years before last March (the beginning of the crisis) was based on flirting with the aspirations of foreign investors to invest in Egyptian debt instruments through the existence of a high interest rate to attract dollars, but its sudden exit caused a lot of pressure on the currency, and that’s where her risks lie and that’s why she’s called Ima (hot money) for her quick exit.
Sahar El-Damati, a banking expert, told Masrawy that raising the interest rate by 3% would not be enough to attract foreign direct investment in T-bills and bonds unless there was an agreement such as activating dollar futures that guarantee investors and pledge for their entry and exit at a precisely determined price in dollars, which reduces the fear of risk.. The price of the pound fluctuated.
What are futures contracts?
The central bank officially announced last October 27, coinciding with its announcement of full exchange rate liberalization, a “flexible exchange rate” against foreign currencies, for financial derivative contracts, due to the exchange rate risks associated with the pound.
The Central Bank has allowed banks to make these derivatives available to corporate clients by performing FX Forwards, FX SWAPs and Non-Deliverable Forwards to hedge exchange rate fluctuation risks. for import customers.
However, banks have delayed dealing with futures contracts that concern hedging the risk of fluctuations in the available currency rate, whether to cover importers or investors in debt instruments, due to the currency shortage crisis and the difficulty of clearly determining the price of the dollar for a certain period of time, according to what officials Treasury previously told Masrawy.
Al-Damaty explained that foreign investment in Egyptian debt instruments helps to cover the lack of financing of the currency and strengthens the price of the local currency against other currencies to increase the demand to buy pounds in exchange for selling dollars, but high interest rates in America against the dollar can limit the speed of re-entry of these investments into emerging markets, including Egypt.
The central bank, on behalf of the Ministry of Finance, periodically sells treasury bills and bonds every week to attract liquidity to cover costs, which is one of the tools used by many countries, including America.
According to Al-Damaty, the continued approach of the Federal Reserve (Central Bank of the USA) in increasing the interest rate to reach from the current 4.5% to 5.5% in the first quarter of next year may give it a competitive advantage and may limit the appetite for foreign entry. investors due to the risk of volatility of the domestic currency compared to the strength of the dollar, which is the currency of the world’s largest economy, the United States of America.
And the Federal Reserve announced the day before last Wednesday, raising interest rates for the seventh time this year, for an increase of 0.5 percent, which was in line with expectations, so that interest rates will be between 4.25 percent and 4 .5 percent. %, the highest level in 15 years, to suppress inflation.
A private bank board member told Masrawy that the policy of raising the interest rate by 3% recently will not attract indirect investment unless the future contract mechanisms are activated so that the investor can be convinced of the bank’s results. the ability to cover liquidity risks in foreign currency and exchange rate fluctuations when exiting the bank.Egyptian market.
He explained that any foreign investor would be worried in the face of a high interest rate to buy the pound at a low value in exchange for selling the dollar they hold and exit on a strong pound while buying back the dollar, exposing it to losses.
He went on to say that, for example, if an investor sells a billion dollars to a bank at a price of £24.70, he will receive (£24.7 billion) to invest in T-bills for specific maturities of 3 months to a year, and when the maturities for permission and he wants to buy back a billion dollars, the price of the dollar has become (23). pounds), so the investor will lose £1.7 billion due to his exit at a stronger pound than he entered, so he wants to get safety before entering.
He added that despite the exit of large amounts of foreign investors from the Egyptian market at once during the current year, all Egyptian banks settled the dollars needed for them, which increases confidence in the Egyptian banking sector and the ease of their return after solving some measure to convince them.
He said the foreign debt investor is not working with his own money, but is borrowing from US banks at an interest rate that has now risen to 4.5% to the dollar, compared to 0.5% previously, to reinvest in the markets. in developing countries, including Egypt, at high interest. Exchange rate on the one hand and high interest on the dollar on the other.
The vice president of international transactions in a foreign bank told Masrawy that raising the interest rate can be a catalyst for the gradual entry of foreign investors who will invest in treasury bills, because they will receive an interest rate exceeding 20% before tax deduction.
He expected the International Monetary Fund’s approval last week of Egypt’s request to obtain a loan of $3 billion in tranches within 46 months to facilitate the entry of international funds to invest in the pound.
The International Monetary Fund’s approval to finance Egypt’s economic reform program is evidence of the world’s confidence in the Egyptian economy’s ability to improve and recover, making it easier to attract indirect investment, according to the source.