Yesterday morning, Egypt’s Central Bank surprised the market with major reforms in an extraordinary meeting. Decisions that will have implications on the EGX, the investment ecosystem, and the wider economy.
These decisions aim to reform the economy and stimulate economic growth.
Here, we will iterate on all the details related to the decisions, what they aim to do, their expected impact and what opportunities might lie ahead.
Reform 1: Greater flexibility for the FX rate The CBE said there will be greater FX flexibility against foreign currencies by allowing supply and demand for the EGP to dictate its value. This would mean that there would be less downward pressure on the country’s FX reserves given that the FX rate will not be maintained at unsustainable levels.
The EGP/USD exchange went on to break the EGP 23 barrier, the lowest-ever level for the EGP.
Reform 2: Removal of import letters of credit The CBE will begin to phase out the use of letters of credit in imports, until it is fully canceled in December 2022.
In short, letters of credit are costly & time-consuming, a major cause of the existing import crisis in Egypt. They were necessary to control the outflow of FX, as previously FX stabilization was the goal. However, they are no longer relevant given the new focus on economic stimulation.
Reform 3: Interest rates increasing by 2% Additionally, the CBE is increasing lending and deposit rates by 2%, to become 14.25% and 13.25% respectively.
This decision aims to decrease inflationary pressures from the demand side.
Int’l Response: A $9 billion aid package As a result of the reforms, Egypt’s Ministry of Finance was finally able to reach an agreement for a $9 billion aid package, divided as follows:
$3 billion from the IMF over 6 months
$5 billion from the international partners
$1 billion from the IMF Sustainability Fund
Which is seen by many as a strong validation of the optimism that is being perceived on the ground.
The facility comes at the right time as the level of FX reserves was raising questions about the government’s ability to cover its short-term debt obligations.
Egypt’s short-term debt by month until March 2023:
* Source: CBE’s External Position of the Egyptian Economy Report (Volume No. 77)
Impact The general consensus is that these changes (as well as the new approach) are positive for the economy as they signal a pivot towards addressing structural issues that have plagued the country. This is further validated by the IMF’s decision to extend a major facility.
These changes have been met with optimism on the investor front, with the exchange’s main index, EGX30, ending the session up almost 5%.
We’re hopeful that the trend will persist given that valuations of Egyptian public companies have been stable at relatively low levels for a while.
FX-based revenue models: Companies with a USD-denominated income tend to benefit from a jump in the EGP/USD exchange rate. These can be companies with exporting operations or those with significant foreign operations. Bonus if their cost basis is in EGP
Interest-reliant institutions: Rising rates generally play in favor of banks, insurers, & other financial institutions companies that can capitalize on the higher rates environment
Importers: Companies that rely heavily on the use of letters of credit in their operations can expect to see a more seamless flow of operations by the end of the year. However, it is worth noting that their expenses will most likely be significantly larger due to higher FX, which might pressure profitability margins.