{"id":550466,"date":"2022-10-30T04:00:43","date_gmt":"2022-10-30T04:00:43","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/2022\/10\/30\/icymi-taweem-3-0-imf-loan-rate-hike-and-more\/"},"modified":"2022-10-30T04:00:43","modified_gmt":"2022-10-30T04:00:43","slug":"icymi-taweem-3-0-imf-loan-rate-hike-and-more","status":"publish","type":"post","link":"https:\/\/enterpriseam.com\/egypt\/2022\/10\/30\/icymi-taweem-3-0-imf-loan-rate-hike-and-more\/","title":{"rendered":"ICYMI: Taweem 3.0, IMF loan, rate hike, and more"},"content":{"rendered":"

<\/a> What the [redacted] happened on Thursday? <\/strong>The Central Bank of Egypt (CBE) at the end of last week went ahead with<\/a> a series of measures to restore liquidity to the FX market and revive investor confidence in the economy \u2014 and topped it off by announcing a USD 3 bn loan agreement from the IMF.<\/p>\n

GO DEEPER- <\/strong>We had the full story along with commentary from analysts and experts in Thursday\u2019s edition of EnterprisePM<\/a>.<\/p>\n

Need the short version? <\/strong>Here\u2019s a recap of what went down:<\/p>\n

#1- The CBE moved to a \u201cdurably flexible foreign exchange rate regime\u201d<\/strong> that allows market forces to determine the value of the EGP, according to a statement (pdf)<\/a>. The CBE price of the EGP fell around 16.3% to settle at a record low of 22.9986 against the USD at Thursday\u2019s close; in banks, it was changing hands at about 23.03 to the greenback.<\/p>\n

#2- The central bank also<\/strong> hiked interest rates by 200 bps<\/strong>, setting the overnight deposit rate at 13.25%, the overnight lending rate at 14.25% and its main operations rate at 13.75%. State-owned banks followed up with three-year, high-yield CDs:<\/strong> Banque<\/a>Misr<\/a>(pdf)<\/a>, the National Bank of Egypt<\/a>(pdf)<\/a>, and Banque du Caire<\/a> each brought to market three-year, 17.25% certificates of deposit alongside other savings instruments with variable interest rates.<\/p>\n

#3- And introduced FX forward contracts and swap agreements:<\/strong> The CBE will allow banks to use FX forward contracts, engage in foreign currency swap agreements for corporate clients, and scrap restrictions on non-deliverable forwards for corporate or retail clients, according to a separate circular (pdf)<\/a>. FX swaps and FX forward contracts will be allowed provided they are used to cover documentary collection, L\/Cs, repatriation requests from foreign investors, or clients\u2019 proceeds from exporting goods and services. Give our nifty explainer<\/a> on forwards \u2014 which are a type of derivative \u2014 a read for a deeper dive.<\/p>\n

#4- The CBE will aim to double FX reserves<\/strong> over the course of the next four years, Abdalla said during a presser on Thursday. Egypt\u2019s reserves stood steady at nearly USD 33.2 bn in September<\/a>, with our primary sources of FX being tourism receipts, exports, remittances, and Suez Canal revenues.<\/p>\n

The questions on everyone\u2019s minds right now: <\/strong><\/p>\n

#1- Did the EGP hit a market-clearing rate against the greenback on Thursday? <\/strong>Analysts are penciling in anywhere between EGP 22-25 by the end of next year. In the nearer term, long-time market watcher Hany Geneina sees the EGP overshooting to anywhere between 25-27 against the greenback and ultimately settling at EGP 25 \/ USD 1 by the end of 2022, while others \u2014 including Goldman Sachs \u2014 also see the EGP weakening further in the near term. The interbank market on Thursday saw about 10x more USD changing hands than the average day in the past couple of months, a strong indication that something around EGP 22.50-23.50 is the market clearing rate for the USD.<\/p>\n

#2- Are we in for a re-pegging down the line? <\/strong>The CBE\u2019s use of the word \u201cdurably\u201d before a \u201cflexible exchange rate\u201d points to the intention of keeping the exchange rate flexible. Exchange rate flexibility was a key demand for the IMF loan \u2014 and was part of the reason that talks stretched on<\/a> for months. \u201cThe stable FX rate had negative impacts on Egypt\u2019s reserves and the economy as a whole, especially in light of the external global economic shocks,\u201d Finance Minister Mohamed Maait said in recent weeks, explaining why the lender sees a flexible exchange rate as crucial for the Egyptian economy.<\/p>\n

#3-<\/strong> How bad will inflation get post-deval?<\/strong> Goldman Sachs sees inflation peaking close to 19<\/a>% in January<\/a>, while Naeem Brokerage sees it peaking at 20% by the end of December, \u201cwhich could require another 100 bps hike.\u201d The uptick, however, will likely be \u201ctransient,\u201d Goldman Sachs analysts say. Inflation hit a fresh four-year high of 15.0%<\/a> in September amid an ongoing surge in living costs fuelled by the war in Ukraine and a weaker EGP.<\/p>\n

#4- Was the rate hike necessary? <\/strong>While analysts we spoke to agree that the rate hike was expected and necessary to tamp down on inflation, we flatly disagree<\/a><\/strong>.<\/p>\n