Following the Russian invasion of Ukraine, there was a large outflow of foreigners from Egyptian public debt instruments, estimated by unofficial sources at around $15 billion. This comes at a time when Egyptian commercial banks have been suffering from a permanent foreign exchange deficit since last July, which has forced the monetary authorities to reduce the exchange rate of the Egyptian pound, to raise interest rates as a prelude to the implementation of further increases, offer external bonds as a prelude to other offers, obtain a support Saudi deposit, increase the Suez Canal passage fees and reduce the consumption of natural gas from power plants owned to the government to keep it for export. Yet despite all of this, the Central Bank’s foreign exchange reserves shrunk by about $4 billion during the month of March.
This led to going to the IMF for a new loan and asking regional and international banks to provide further loans. It has also led to the expansion of the sale of government assets for Gulf investors, whether from the United Arab Emirates, Saudi Arabia or Qatar, as well as the sale of properties and units of housing, including plots of land for the use of expatriate Egyptians as cemeteries, with the aim of acquiring more dollars.
Egypt has increased its reliance on “speculative money” in order to bring dollars to the Egyptian market, despite the huge costs involved, due to the high interest rate of the instruments that attract them throughout mandates served by Farooq Al-Uqdah and Tariq Amer as Governors of the Egyptian Central Bank. The mandate of the former lasted nine years, between 2003 and 2013, while the mandate of the latter lasted until now, six years. He has been in his position since 2015.
Violent departure five times, including one for six years
During this period, and according to reports of foreign purchases of Egyptian treasury bonds, as a public debt instrument in addition to treasury bonds – given that government agencies did not publish anything on the foreign purchases of treasury bills – the last six years, from 2006 to this year, have witnessed five times in which foreign outflow has been quite violent away from their purchases of treasury bills, in addition to five other cases of less intense output.
“Hot money” seeks opportunities for higher profits in changing markets, whether through the existence of high interest rates or profit opportunities on changing exchanges, regardless of the risks in these countries, where they locate commensurate profit ratios with these risks. As soon as the level of risk – whether political or social – increases, or when the benefit of the allocated rate of profit decreases, this “hot money” rushes in pursuit of other markets deemed more profitable.
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For this reason, the late professor of financial management, Dr. Munir Hadi, named them “the flying bird”, or “the bird that only makes a very brief stop on a tree branch to feed and then flies to another tree”, in order to repeat the same feat. This is how “hot money” arrives in Egypt in order to benefit from the high interest rate on Egyptian public debt instruments. However, it quickly departed with the onset of the global financial crisis which hit during the period of 2008 to 2009.
Following the January 25, 2011 revolution, the money left Egypt and remained outside until late 2016, for six consecutive years. He only returned after the Egyptian pound floated in 2016. Then, in 2018, with the start of the US-China trade war and falling interest rates in Egypt, he left for eight months. Then, following the outbreak of the Corona virus, he came out once more and did the same again following the Russian invasion of Ukraine.
Annual profit over $11 billion
The other five less intense outings took place in 2006, for a period of two months; in 2007 for a period of three months; in 2010, in May, then during the last three months of the year, in the wake of the legislative elections which resulted in an almost total control of all the seats by the party in power; in 2019, for two months because of the demonstrations organized in September; and, in 2021, for four different months, influenced in particular by the announcement by the US Federal Reserve of its intention to raise interest rates.
Each time, its outflow influences the exchange rate of the Egyptian pound, as well as foreign exchange reserves, depending on the intensity of the outflow itself. When the supply of foreign currency decreases, authorities often reduce the Egyptian pound’s exchange rate or raise the interest rate to levels above those of other competing evolving markets in order to re-attract the ” hot money”. Or, they may resort to more borrowing to compensate for the lack of liquidity in dollars, a consequence of the outflow of “hot money”.
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The enormity of the cost of “speculative money” is underscored by the increase in income from investment payments in Egypt, which rose from $1.7 billion in 2006 to $9.6 billion in 2018 and then up to $11.6 billion in 2020. They reached the sum of $11.4 billion in the first nine months of last year, according to the latest data published. This means that they should reach $15 billion by the end of the year, including interest on foreign loans.
This cost has had an impact on the Egyptian budget, with interest on the public debt now constituting the largest item of budgetary expenditure, at 37% of the total. This therefore has an impact on the share of the five other budgetary expenditures, in particular investments, subsidies and salaries.
“Hot money” dictates monetary policy
The value of these funds appeals to monetary policy makers, in that it helps them boast of exchange rate stability and the willingness of foreign investors to invest in government debt securities and finance public imports, whether in the food or energy sectors or even in security.
The figure of 33 billion dollars was exceeded last August. Comparing this figure with the foreign exchange income figure of the Egyptian balance of payments during the last fiscal year 2020-2021 which ended last June, we find that remittances from Egyptian expatriates reached the value of $31 billion. Net commodity exports were less than $29 billion. The used amount of foreign debt is about $13 billion, while net foreign direct investment is $5.2 billion and Suez Canal revenue is $5.9 billion.
This is what encourages them to take the risk of continuing to attract this “speculative capital”, despite their awareness of the potential risk. After all, money comes out quickly, whether for internal or external reasons. Such a sudden departure poses additional problems for an already beleaguered economy.
In fact, monetary policy has become hostage to this “hot money”. When determining the interest rate, the monetary authorities mainly aim to satisfy these “hot money” by raising interest rates, despite the damage this causes to local industries and exports, as well as to the competitiveness of these exports vis-à-vis the exports of other States. The same applies to the determination of the exchange rate, the rate deemed appropriate by these authorities becoming the reference of the Central Bank.
Tax policy follows suit, where tax discrimination is practiced in favor of foreign transactions on the stock exchange in an attempt to entice them to return, their departure during the last three years and even during the first months of the current year.
Translated from Arabi21, April 10, 2022
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