The Central Bank of Egypt’s (CBE) last decision to raise interest rates is aiming at helping the biggest economy in North Africa to build up international reserves, Arqaam Capital said in a research note issued on Tuesday.
“We believe the CBE could have opted to raise rates to render Egyptian debt even more attractive to help build up its international reserves in anticipation of next year’s debt payments,” the Dubai-based consultancy said.
Egypt’s foreign reserves edged up to $28.641bn at the end of April from $28.5bn at the end of March.
The Arab world’s most populous country’s reserves have been climbing since it clinched a $12bn three-year loan from the International Monetary Fund (IMF) in November in a bid to lure back foreign capital.
The country had roughly $36 billion in reserves before the uprising in 2011.
“The IMF staff agreement report indicated there is a likelihood that part of its external debt will be rolled over—as we expected—given the sheer size of the amount, but there still will remain a very sizable amount to be paid in 2018,” Arqaam explained.
Egypt has around $13bn in external debt payments coming up in 2018, according to official data.
The report also said that the timing of the hike is “interesting, as well, given that most fixed income investors are opting to invest in Egyptian debt while the EGP is weak, in anticipation of an appreciation later in the year, giving investors a double whammy in return.”
“The EGP’s appreciation will not, however, surpass the 10% level in 2017, in our view, given the pressure on the current account and continuity of the ban on Russian and UK tourists and the lifting of all caps by the end of June ($100k for individuals and $50k for importers of non essential goods),” Arqaam added.
The report considered tourism as the game changer for the current account balance, “considering the expected relative stability in other FX resources and the trade deficit. Tourism revenues have been rising, with the recovery in tourist arrivals and average spending per night,” it confirmed.
Tourism has been recovering steadily since Q2 2016, with the latest figures showing a 51% jump in revenues to $1.7bn in Q1 2017, compared to $1.2bn in Q1 2016.
Meanwhile, the IMF welcomed raising the interest rates, saying it aims at the welfare of the Egyptian people and tackling a rampant inflation.
“We welcome the step taken by Egypt’s central bank. It aims at the welfare of the Egyptian people,” Chris Jarvis, the IMF’s mission chief for Egypt, told Al-Borsa.
