CBE takes first step to phase out repatriation mechanism

 
The Central Bank of Egypt (CBE) revised the pricing of using its repatriation mechanism for portfolio investors, increasing the entrance fee to 1% (instead of a previous 1 piaster), while maintaining the 0.5% exit fee as is. Increasing the cost of using the mechanism clearly devises an incentive for investors to start using the interbank market instead. A total cost of 1.5% is likely to increasingly become substantial over the next period, since yields will decline as CBE is set to kick off an easing cycle in 1Q18. The move also clearly reflects CBE’s confidence in the strength of the interbank market. We have been expecting the decision for a while now, first flagging this proposition back in July, after foreign inflows had reached sizeable levels and with the interbank market growing increasingly stronger. 
 
A positive message for Egypt’s reform story

 
The move is particularly positive, given two key considerations, in our view. First, the move comes after the interbank market had been tested the “hard way”, with the market funding close to USD500mn of portfolio outflows – based on anecdotal evidence – in the past few weeks, with only a small 0.5% weakness in the currency. We understand an increasing number of investors have been exiting their trades – originally going through the mechanism – through the interbank market, with the latter funding the outflows from its own resources, having not enjoyed these inflows in the first place. This indicates the interbank market is increasingly becoming a deep and liquid market. Second, the move also comes after CBE had scrapped the last standing currency controls, namely deposit and withdrawal controls on importers of non-essential goods. This clearly implicated a growing confidence by the CBE in the FX market, one year after the move to a liberalised currency regime. 
 
What does this mean for the EGP?

 
Clearly, CBE will be, relatively, increasingly volatile, as more portfolio flows are channeled gradually through the interbank market. In the short term, the EGP might remain under pressure, given that we are expecting to see net outflows from the carry trade, as we approach end of year and the easing cycle. This depends, though, on the balance between outflows/inflows through the repatriation mechanism vs. the interbank market. In the medium to long term; however, we expect the decision to drive some EGP appreciation as it boosts the case of the carry trade – by allowing a more liberalised FX regime – and reinforcing the reforms story. In all cases, we see the USD-EGP remaining within the EGP17-18 range in the next 12 months.