Foreign assets and liabilities of the banking sector

According to the CBEs data, the net foreign liabilities in the banking sector (central + banks) amounted to $20 billion at the end of August 2022.

Net foreign liability position = -$20 billion

What does this number mean?
1 The word “foreign” in this context means a financial relationship between financial institutions in a country with non-residents and does not necessarily mean a relationship with a foreign currency. Although the dealings of Egyptian banks with non-residents are also carried out in hard currency, understanding the origin of the definition is very important for understanding the subject.

Foreign = non-resident

2. For this reason, if the National Bank lends 50 million dollars to Arab Contractors, for example, this loan is not classified as “foreign origin” on the National Bank’s budget, although it is in dollars because it is a loan to a resident company based in the Arab Republic of Egypt.

It is classified as a domestic dollar-denominated loan.

Domestic assets denominated in $

3. Most of the foreign obligations recorded on the balance sheets of Egyptian banks are short-term loans from foreign banks and Arab, Asian and European development institutions such as HSBC-London, JP Morgan, European Bank for Reconstruction and Development, and so on.

4. The $20 billion gap means that Egyptian banks borrow more from non-residents than they do with non-residents at $20 billion. Ok, what did they do with the money if they did not invest it with non-residents?

5. One of the main reasons that Egyptian banks have huge net commitments abroad is that they borrow from abroad to provide loans in hard currency to Egyptian companies.

6. This means that the size of the gap between foreign assets and liabilities is not equal to the size of the gap between dollar-denominated liabilities and dollar-denominated assets unless the Egyptian borrower fails to provide dollars to repay the loan.

Example
1 Al-Ahly Bank borrowed $100m from HSBC London. Since this is a relationship with a non-resident bank, the loan remains classified as a foreign obligation.

Foreign Liabilities = $100 million

Scenario 1: The National Bank used the proceeds of the loan to invest in US Treasuries through JP Morgan Bank in America. This is called a foreign origin because the money was invested outside Egypt with a non-resident bank.

Foreign Assets = $100 million

In this case, net foreign assets/liabilities = zero because both have some.

Scenario 2: The National Bank used the proceeds of the external loan to lend a ready-made garment company specialized in exporting to America to purchase raw materials from India.

In this case, the loan (which is an asset on the bank’s balance sheet) is not classified as a foreign asset because it is presented to an Egyptian company, although it is denominated in dollars and it is supposed to be paid in dollars on time as well.

So, although the net foreign liabilities = minus $100 million, the net exposure to the risk of a change in the exchange rate = zero because the bank is waiting to repay the loan in dollars.

As it is clear, the main risk in Scenario 2 is the use of external loans to finance non-exporting companies (importing) or the Egyptian exporting companies defaulting in dollars, so the bank cannot pay its external obligation to HSBC London.