• Equity market may welcome new policy, but we stay Neutral We expect the market to welcome the CBE’s move to ease USD cash deposit limits as it will improve companies’ access to FX – a key overhang on activity over the past year – and indicates that the CBE is moving to resolve FX shortages. Egyptian stocks have fallen more than 40% since deposit limits were introduced a year ago, with the lack of clarity on FX policy weighing heavily on the market. We remain Neutral on Egyptian stocks until the path for EGP becomes clearer.
Policy shift improves FX access for selected sectors The CBE has waived daily USD cash deposit limits and increased the monthly limit five-fold to USD250,000 for a number of importers of food, capital machinery, manufacturing components and pharmaceuticals, according to a CBE statement; i.e. most of the goods are already on the CBE’s priority list. Limits for other sectors and retail will remain in place.
• Contextualizing the move – structural steps to ease FX shortages The relaxation of the deposit limits has come after authorities have cut demand for luxury and low quality consumer goods through various directives over the past few weeks, indicating a willingness to make sure improved liquidity is directed towards satisfying basic needs and supporting productive sectors. This is especially the case amidst a successive decline in the country’s key sources of foreign income.
• Move hints EGP is on the devaluation path … We have previously noted that the CBE is on a path of EGP devaluation with the arrival of a new governor, where a relaxation of deposit restrictions would hint at potential devaluation. Demand for FX on the parallel market will obviously rise as the deposit cap is relaxed, leading to a widening of the parallel market premium - the gap is currently c10%, with USD-EGP at cEGP8.60 in the parallel market. The continuing limit on FX deposits aims to control this widening, in our view. The CBE is using this tool to boost liquidity in the short term, but eventually it will have to close the gap to create a sustainable FX market.
• … But probably not that imminent We still believe CBE needs to build a ‘Liquidity Shield’ i.e. a stronger FX reserve position, before being able to close the gap with the parallel market and defy currency speculators. Receiving cash support from the GCC, now being negotiated, as well as the World Bank USD1 billion loan instalment, should boost the CBE’s position. The recent loan of USD1 billion from China feeds into building the buffer. The FX position may also be boosted if the Russian travel ban on Egypt is reversed soon.

Mohamed Abu Basha
Simon Kitchen