Moody’s: Egypt’s USD certificates ‘positive’, but ‘insufficient to quell liquidity pressures

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The sale of US certificates for sale to Egyptian expatriates will increase the three government-owned banks’ dollar funding; a credit positive especially since bank dollar liquidity has tightened in recent months, Moody’s said in a release on Wednesday.

The Central Bank of Egypt (CBE), the Minister of Immigration and Egyptian Expatriates, and the leading government-owned banks, National Bank of Egypt and Banque du Caire, announced Monday the launch of US dollar certificates for sale to Egyptian expatriates. “We estimate the increase is insufficient to alleviate the needs of business foreign currency and covers less than one month of imports, so banks’ foreign currency liquidity cushions will continue to decline,” Moody’s said.

The “Bilday” certificates will be available to Egyptian expatriates and will carry a fixed interest rate. A one-year certificate will be issued at 3.5% per year, a three-year certificate at 4.5%, and a five-year certificate at 5.5%. Given these high returns, the products will likely be appealing to investors. Egyptian expatriates remit mainly to cover their families’ daily needs, although a small part is also intended for saving.

In September 2014, Egyptian banks raised EGP 64bn ($8.5bn) in investment certificates to finance the Suez Canal widening in only eight days, exceeding the authorities’ expectations. Nevertheless, the state is facing a severe shortage of dollars and the funds raised will not be enough to meet business demand.

The World Bank estimates remittances in 2015 were around $20bn, although only a small part is captured by the banking system because less than 10% of the adult population have a bank account. Moreover, recipients of remittances in bank accounts usually withdraw these funds to benefit from better rates in the unofficial market.

Even for example if 10% were invested in the Biladiy certificates, the banks would only raise around $2bn, less than one month of imports, Moody’s said. The move came after Egyptian companies complained to the government that Egyptian banks do not have enough dollars to sell to them to meet importing needs. Egyptian authorities have recently taken myriad steps to increase the availability of dollars to businesses operating in the high priority sectors of pharmaceuticals, food, and manufacturing.

The government tightened the criteria and procedures for importing goods that are not included in a priority list  established in 2011 and increased tariffs on such goods.

In addition, CBE recently previously eased installed cash dollar deposit limits to allow importing companies to buy dollars from unofficial traders and deposit them in banks to use them to finance their imports. “Given the severe dollar shortage, we do not consider these banks’ increased dollar funding to be enough to offset the erosion of foreign-currency liquidity cushions,” Moody’s said.

The banking system’s liquidity ratio, cash due from banks and liquid investments as a percentage of foreign assets, in foreign currency declined to 48.9% as of September 2015 from 57.4% in June 2014, “But we estimate the ratio is materially lower at around 27.5% if we exclude the banks’ investments in foreign- currency Egyptian government bonds and treasury bills, which are usually renewed at their maturity,” Moody’s said.