Egypt Banks Bore the Brunt of Outflows in Replay of 2018 Exodus

(Bloomberg) -- Egypt's commercial banks provided dollars to investors in March, helping keep the local currency stable during a bond selloff.

The net foreign liability position among lenders reached $3.5 billion last month, a reversal from February when they had net foreign assets of $7.9 billion, according to central bank data published on Thursday.

Read more: Egypt Foreign Reserves See Record Fall as Virus Menaces Markets

Egypt saw $13.5 billion of outflows in March, as foreign holdings in local securities shrank almost by half. The central bank partially covered the pullback of overseas portfolio capital through its foreign-exchange repatriation mechanism, which guarantees investors can withdraw profits in hard currency. As a result, the country's net international reserves fell by a record of $5.4 billion last month.

What Our Economists Say...
“The decline in central bank's reserves in March, while significant, wasn't large enough to offset the massive portfolio outflows. The sharp deterioration in the net foreign assets of commercial banks suggests their balance sheet was likely the channel of intervention to keep the pound stable, much like what happened in 2018.” -- Ziad Daoud

In a replay of an emerging-market rout that spilled into Egypt in 2018, the latest exodus by investors also failed to rattle the pound. Once a beneficiary of one of the world's most profitable carry trades, it's still the second-best performing currency against the dollar this year. In March, it depreciated less than 0.9% against the U.S. currency, compared to declines of over 12% for South Africa's rand, Brazil's real and the Russian ruble.

Maintaining stability in the currency market may start to get easier, after global uncertainty stemming from the coronavirus outbreak took its toll on portfolio investments in emerging markets. In Egypt, bond outflows slowed to $529 million in April from $3 billion in March, according to Ahmed Hafez, head of research for the Middle East and North Africa at Renaissance Capital.

Egypt has also moved to shore up confidence this month by asking the International Monetary Fund for fresh funding under a stand-by agreement in addition to the lender's rapid financial instrument. The central bank's net international reserves were at $40.1 billion as of end-March.

“We have definitely seen the worst of the capital flight,” Hafez said. “Banks are likely to have covered part of the capital flight that the country witnessed in March. We are not overly concerned as we have been there post the 2018 sell-off and recovered fairly well. Also, the central bank has enough buffers to cover the net liabilities.”