Jul 25 2013
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Egypt's forex reserves to reach USD20bn by 2014
The Central Bank of Egypt's (CBE) foreign exchange reserve is expected to reach USD 20 billion by the end of 2014 as GCC countries announced their commitment to invest in the country over the next two years and help prop up the turmoil-hit domestic economy.
Over the recent weeks, Egypt's banking sector has managed to heave a sigh of relief after a USD 5 billion aid from Saudi Arabia and the UAE was released in June, allowing the value of the US dollar and other foreign currencies to stabilize, both officially and in the black market.
Following the ousting of former president Mohamed Morsi in July, the CBE has received USD 5 billion of the USD 12 billion grant handed by some oil-producing Gulf states to Egypt. Economic analysts agree that the purpose of this financial support is to revive the Egyptian economy, which saw foreign exchange reserves plummeting by USD 12 billion during the first quarter of 2013.
Kuwait also reportedly allocated a USD 4 billion aid to Egypt, but ongoing financial constraint has hampered the Kuwaiti government from releasing the money.
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"This financial support will not work like magic," said Ashraf Al-Arabi, minister of planning. "The action plan of the ministerial group on economic issues is to treat this financial support as a temporary instrument to balance the foreign exchange reserves and to re-adjust the fiscal policies, after the new government reviews its working budget and that used by the former government under Hisham Kandil".
He added that the government is facing the difficult challenge of reducing the current budget deficit that has reached 13% this year. This requires increasing investments in high-income projects, a plan expected to rely on partnerships with banks.
Al-Arabi, however, ruled out the possibility of turning to long-term projects as a solution. "Our priority for the time being is to work on stalled projects and push banks to support them," he said.
"We have 200 factories that are facing a deficit, which we hope to resolve by the end of the year. The government is also considering economic reform in order to improve the Egyptian credit rating and gain some of the foreign investments back."
Economic experts predict that such an increase in the liquidity of the Egyptian central bank will not have a long-term benefit if it is not coupled with new policies to encourage productive projects and increase investments in both private and public sector.
Mohamed Abbas, vice-president of Banque Misr , the second biggest bank in the country, said adding the money into the foreign exchange reserve will reduce constraints on internal borrowing, which is very important in easing the pressure on banks, allowing them to invest in various sectors.
"The increase of internal debt, which is about 94% of the value of the national income, constitutes a problem that reflects negatively on the banks' ability to support and partner with the private sector's projects," said Abbas. "This certainly affects the activities of the private sector, which is already cautious because of the instability of the financial sector and the decline in growth rates."
He added that these concerns became evident when, during the fiscal year 2012-2013, banks started increasing the overall financial reserves and allocations in order to prevent the risk of default as well as investment problems in various stocks.
The overall reservesbetween July 2012 and April 2013 increased by EGP 6.5 billion to reach EGP 60.894 billion, while the allocations increased by EGP 12 billion to reach EGP 37.639 billion.
Recently, Egyptian banks increased the risk rating in investment funding, which restricted them to retail activity. However, Abbas is confident that the recently gained trust in investment and the new government economic policies will attract additional investments.
The GCC countries' financial support and the increase in investments are expected to bode well for the domestic bond market.
"The increase of the foreign exchange reserve coupled with the government's efforts to increase foreign investment in the country is expected to have a positive impact on the Egyptian bond market," said Abbas. "These grants and loans will also influence the value of the Egyptian pound compared to the US dollar. Recent exchange rates show that the US dollar has stabilized to approximately EGP 7.03."
Similarly, those investments will benefit the stock market, said Mona Zulfikar, president of EFG Hermes. "This financial support should draw many Arab investors to invest in the Egyptian stock market. Some, especially from the lending countries have already showed interest in this type of investments," she said
Zulfikar added that the aid has been influential in reviving the Egyptian market and helped in increasing spending, which spurred confidence on the Egyptian economy's ability to regain its strength.
"The Egyptian market is completely capable of dealing with its problems. It is true that the stock market faced major losses since the beginning of this year. However, adding liquidity to the central bank at such a pace altered the negative anticipation which often results in a decline in the stock value," said Zulfikar.
She also mentioned that the performance of the stock market has improved, but investors, especially those from overseas, continue to closely monitor the new government's policies for economic reform.
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