Egypt’s Macroeconomy to Face Challenges With Maturity of 18% Yield Cds This Month: Experts

The one-year certificates of deposit (CDs), with 18 percent annual yield the National Bank of Egypt (NBE) and Banque Misr issued in March 2022, will mature on 19 March, raising questions about the local market's reaction.

The two state-owned banks offered these CDs on the back of the depreciation of the Egyptian pound against the US dollar the Central Bank of Egypt (CBE) applied following its exceptional decision to raise key interest rates for the first time since 2017 by one percent (100 bps).

This came as a result of the severe repercussions of the Russia-Ukraine conflict that hit the Egyptian economy.

The proceeds of the CDs reached $750 billion in 70 days and will be disbursed to their holders at a total value of $885 billion, after applying the 18 percent yield.

Speaking to Ahram Online, banking expert Ahmed Shawky said that the value of the CDs represents 10 percent of the total deposits of the Egyptian banking sector that amount to EGP 7.8 trillion, which is huge.

“This amount, if not handled through offering new saving facilities, will significantly feed the country’s already soaring inflation,” Shawky asserted.

Egypt’s inflation has been on the rise since the outbreak of the war on Ukraine. Annual headline inflation hiked in February to 31.9 percent, up from 10 percent in February 2022 and 26.5 percent in January, reported the Central Agency for Public Mobilisation and Statistics (CAPMAS) .

The CBE said in February that the core inflation jumped to 31.2 percent in January, up from 24.4 percent in December 2022.

Shawky noted that February’s inflation figures will determine if banks will offer new CDs or not, stressing that if the core inflation keep its upturn, banks will have to offer new CDs to collect this huge amount of savings to avoid feeding the inflationary wave.

He also warned that the absence of new CDs will encourage savings owners to adopt dollarisation as a safe haven amid the crisis.

After several devaluations of the Egyptian pound against the US dollar over the past year, the Egyptian pound lost over 50 percent of its value against the greenback and has been depreciated against the US dollar by over 100 percent compared to its levels prior to the onset of the European conflict.

At present, the US dollar is traded for above EGP 30.60 per $1, compared to EGP 15 in March 2022, while it is traded for over $34 in the parallel market.

“The CBE is expected to apply a further devaluation of the Egyptian pound by 10 percent in March, through which the US dollar is projected to be traded for between EGP 34 and EGP 35.

This trend will feed the dollarisation in the local market, especially that the government has failed, so far, to wipe out the black market,” Shawky pointed out.

Importers in Egypt are suffering from a shortage of the hard currency, especially the US dollar, to finance importing their shipments.

Local banks are also reported to have stopped issuing letters of credit (LCs) for importers due to the lack of US dollar liquidity in the domestic market.

Savings owners could also opt for investing their money in investment funds that offer up to 24 percent in annual yield or to purchase the regular 17 percent CDs that a number of private banks offer, according to Shawky.

Recently, both Al-Ahli Bank of Kuwait and the Arab Bank issued new CDs with annual yields of 17.5 percent and 18 percent, respectively.

“The government has to provide out-of-the-box solutions to absorb this liquidity and to contain a further rise in inflation.

Tightening control of the market in terms of commodity prices, curbing the activity of the parallel market, accelerating the implementation of the initial public offering (IPO) programme, and boosting investments are key areas the government have to work on to deal with this challenge,” Shawky proposed.

Commodity prices are seeing significant rises up to 300 percent.

On a second ground, capital and stock market expert Hanan Ramses expected state-owned banks will offer new CDs with higher yields to absorb the huge liquidity.

The annual yield could range between 28 percent and 30 percent, according to Ramses.

After collecting around $460 billion in less than a month, the biggest state-owned banks -- the NBE, Banque Misr, Banque du Caire -- stopped in January the issuance of the 25 percent annual yield CDs, the highest yield ever in Egypt.

The CDs were available for local and foreign depositors.

The three banks issued the CDs in a bid to tackle inflation and attract foreign exchange currencies amid the hard currency shortage the local market suffers from.

“The government should hasten its efforts to initiate the offering of shares of the 32 companies it announced to be floated in the Egyptian Stock Exchange. Investing in the stock market is highly profitable.

With the first devaluation applied to the Egyptian pound against the US dollar in March 2022,

Egypt’s EGX gained EGP 2 billion and it has continued to gain more points to its main indexes from December to date,” Ramses explained.

Investing in the stock market is a safe haven, especially with the great appetite Arab investors have for share purchasing and acquisitions, she added.

On 15 March, the International Monetary Fund is anticipated to conduct the first review of its Extended Fund Facility programme it approved for Egypt in December, through which Egypt will secure a total loan of $3 billion over four years.

In the event that this review is approved, Egypt will receive the second tranche of the loan worth $347 million, bringing the total amount Egypt has been handed, so far, to $750 million through the end of FY2022/2023 that ends on 30 June.

Under this programme, Egypt has clear commitments to bringing inflation down to seven percent through FY2024/2025, reducing the government footprint in the economic activity, implementing privatisation programmes, and adopting flexible exchange and interest rate regimes.