Egypt’s net foreign asset position will likely get worse before it gets better: That’s according to a report from Fitch, which says that a combination of foreign outflows, import backlogs and a managed exchange rate will likely intensify FX liquidity pressures in the banking sector.

ICYMI- Record liabilities: Net foreign assets in the banking sector have deteriorated heavily over the past two years, swinging from a EGP 26.4 bn surplus in June 2021 to a record EGP 529 bn deficit(USD 17.1 bn) in June this year due to the ongoing FX crunch.

The pressure points:

#1- The exchange rate: “Prolonged management of the exchange-rate regime could put further pressure on the banking sector’s NFL position,” the rating agency writes. Under its USD 3 bn IMF program, the government committed to moving to a fully-flexible exchange rate but since March has maintained a stable USD exchange rate while it tries to build up FX reserves ahead of a possible float.

Movement coming? The IMF was scheduled to conduct a review of the program this month, a review that is thought to be contingent on authorities moving towards a flexible exchange rate. The current consensus is that there will be another devaluation of the currency before the year is out, the scale and timing of which is uncertain.

#2- A growing import backlog: The sector’s NFL position will widen if banks are used to clear the estimated USD 5.5 bn import backlog, as they were at the end of December, Fitch writes.

The upside risk? “Exchange-rate pressure could moderate if the authorities succeed in selling assets to external investors, boosting capital and foreign-currency inflows into Egypt,” according to the rating agency.

Privatization so far: Several asset sales announced in July have netted the government USD 1.65 bn in FX proceeds, while an agreement this month to sell 30% of Eastern Company will bring in another USD 625 mn. Its revised target aims to raise USD 5 bn via its asset sale program by the end of 2Q 2024.

#3- Expect more outflows from local debt: Fitch said it is “highly likely” that foreign investors will continue to pull money from the local debt market due to negative real interest rates, low appetite for emerging-market assets, and tight global financial conditions.

Remember: Investors have pulled more than USD 20 bn from the local debt market since last year. Foreign t-bill holdings have declined from USD 21.3 bn at the end of January 2022 to about USD 13 bn at the end of April.

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