• USD1.5bn injection to clear refinance position The Central Bank of Egypt (CBE) announced on its website that it will hold another exceptional FX auction tomorrow, selling USD1.5 billion. The sale aims to cover “clients’ foreign currency refinance related to import transactions.” This means that the bank will sell dollars to cover clients’ FX loans they borrowed in order to import their raw materials/machinery amidst foreign exchange shortages (versus the normal practice of opening letters of credit). Such positions are open ones, in the sense that the client has deposited the equivalent EGP (actually 110% of the loans’ USD value) and they still owe the foreign currency to the bank; therefore they are carrying the FX risk in the meantime.
• Cash or no cash? That is the question The key to tomorrow’s auction is whether it will involve a direct cash injection or not. Last year, the CBE held two auctions for the same purpose and there were no cash injections as banks were asked to deposit the money back at the CBE for one year deposit for a return of LIBOR. In that sense, no liquidity exchanged hands then. A CBE official told Reuters the CBE aims to eliminate the parallel market with tomorrow’s large injection, possibly hinting the auction would likely see a cash injection. If that is the case, then CBE’s cash injections would have stood at cUSD2.5 billion in the past ten days, providing considerable support to CBE’s efforts to corner the parallel market.
• Expect a stable USD-EGP price We expect the CBE to maintain the USD-EGP at EGP8.85 in tomorrow’s auction as it did in today’s. One cornerstone of the CBE’s efforts to improve FX liquidity rests on attracting funds in the parallel market into official channels. To that end, it is deploying various tools to lure locals to de-dollarize, stop speculation on the EGP’s value and sell their foreign currency holdings into the banking system, including the 15% three-year certificate of deposit the public banks announced yesterday (where clients must sell their foreign currency holdings in order to get the high returns offered; the offer is only available for the next two months). In that respect, any movement in the EGP in the short term, in our view, would discourage this dollarization process in the domestic economy as it would send a signal to the public to hold on to their foreign currency holdings.

Mohamed Abu Basha