In these troubled economic times most investors have been looking for any glimmer of hope for their country’s economy. One such glimmer recently arrived here when the Central Bank of Egypt issued a report claiming a large rise in the nation’s foreign reserves.
The CBE’s report released Saturday estimates that foreign reserves had reached about $34.1 billion by the end of November 2009, compared to $31.3 billion at the end of the last fiscal year 2008/09 which ended in July 2009.
The CBE’s net foreign reserves experienced an increase of $2.8 billion by the end of November 2009, in comparison with its levels in June of the same year, according the report.
Most of the reserves come in the form of securities, standing at $29 million, the next largest contributors being IMF reserves, SDRs, and gold evaluated at market price.
The results are in sync with regional peers such as Jordan, which had an impressive 40 percent increase in foreign reserves by year’s end from 2008 levels. The increase was in large part due to a policy change in the Central Bank allowing a wider interest rate differential against the American dollar in favor of the Dinar, effectively encouraging banks and depositors to keep funds in Dinars.
The boost in foreign reserves allows both countries to demonstrate their immunity to the global economic turmoil and the recent economic and liquidity issues faced by the GCC countries.
It also represents a second year of foreign reserve growth for Egypt (reserves grew by 3.7 percent in 2008) in spite of a $378 million drop in reserves in February. Foreign reserves resumed positive recordable moves again when in June 2009 they reached $31.63 billion against $31.31 billion in May 2009. The reserve level had one of its largest jumps in August going up to $32.91 billion, from $31.63 billion a month earlier.
According to the bank, the rise was due to “both the currency in circulation outside the banking system by LE 9.1 billion or 7.7 percent and demand deposits in local currency by LE 2.6 billion or 4 percent.
The CBE report also noted that the volume of foreign debt had declined by about $2.4 billion to $31.5 billion at the end of June 2009 as a result of paying $1.1 billion of loans and facilities. It was also due to the decline in exchange rates of most currencies borrowed against the US dollar.
The move comes at a time when many countries are trying to improve their reserves to advance economic security. With the global financial architecture in a state of flux, prominent voices are calling for a shift away from the traditional dollar centric reserve system.
The total volume of domestic debt had increased to LE 813.7 billion ($160 billion) at the end of September 2009. The volume includes government debt of 75.5 percent, public and economic bodies 6.8 percent and the National Investment Bank 18 percent.
On the other hand, the report showed an increase in domestic liquidity by LE 16.5 billion ($3 billion), to record LE 847.8 billion ($170 billion) in October 2009, by an increase of 2 percent compared to the month of July 2009.
Central Banks usually keep most of their reserves in fairly stable governmental fixed income securities, such as the US treasuries. The value of fixed income securities usually climb when interest rates decline.
For example, as per the US Federal Reserve Statistics, the rates on the 10-year US treasuries went down from 3.72 percent in June 2009 to 3.40 percent in November 2009.
The same happened with the rates on the seven-year US treasuries going down from 3.37 percent in June 2009 to 2.92 percent in November 2009.
This would mean that the lower interest rates on these fixed income securities resulted in an increase in the value of these securities in November 2009, which could be one of the contributing factors for the increase in the value of the CBE reserves in November.
Investing in US treasuries is not particular to Egypt. Foreign demand for long-term US financial assets jumped sharply in November 2009. Analysts viewed the big increase as a sign of renewed optimism among foreign investors about economic growth prospects in the United States and a flight to safety by investors worried about debt problems in Dubai and European nations such as Greece.
Successfully heightening reserves comes as good news for the government of Prime Minister Ahmed Nazif, which aims to establish Egypt as a safe destination for investment and commerce.
Over the past year inflation rates experienced a precipitous drop from a peak of 23.6 percent in August 2008 to hover at around 13-14 percent, and Egypt has maintained growth rates over 4 percent of GDP.
These developments coupled with the growth in foreign reserves and continued reforms are sure to bode well for Egypt’s investment future.
