Egypt Gap in Bank Foreign Buffers Turns to $14.3 Billion Surplus

(Bloomberg) -- Egypt patched up a key vulnerability of its finances after a mega investment deal paid out, bringing the net foreign assets of its lenders and the central bank into surplus for the first time since early 2022.

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After running a deficit that peaked near $30 billion earlier this year, the banking system’s net position dramatically swung to a positive $14.3 billion at the end of May, according to central bank data released late on Thursday. It had a shortfall of $3.6 billion in April.

The turnaround resulted from a $11.8 billion increase in foreign assets held by Egyptian lenders and the central bank and a $6.2 billion decline in their liabilities.

A series of economic shocks have caused a massive drawdown in Egypt’s net foreign assets since February 2022, when Russia’s invasion of Ukraine sent commodity prices soaring and led to some $20 billion in foreign outflows from Egypt’s local debt market that year.

But the investment by the United Arab Emirates, worth a total $35 billion, marked a reversal of fortunes for Egypt. It allowed for a long-awaited currency devaluation that unlocked more financing from the International Monetary Fund and others, while drawing back billions of dollars in portfolio inflows.

The arrival of fresh funding is enabling Egypt to build its capital buffers back up. The North African nation on May 15 said it had received a second tranche worth $14 billion from the UAE pact, while $6 billion in existing Emirati deposits in Egypt’s central bank were converted to pounds.

What Bloomberg Economics Says...

“Net foreign assets of Egypt’s banking system have improved by a staggering $43 billion since January. International support likely played a role, especially the $35-billion mega investment from the UAE. But the scale also suggests portfolio inflows are back.”

— Ziad Daoud, chief emerging-markets economist. Click here to read more.

A total of about $57 billion has been pledged. The UAE deal also helped send Egypt’s net international reserves for end-May to a record high of $46.1 billion.

Egypt’s central bank had in previous years sometimes used banks’ foreign assets to stabilize its pound. In a report last year marking the approval of an earlier loan, the IMF said that although the regulator can intervene in the case of extreme volatility, it shouldn’t use such assets to support the exchange rate.

(Updates Bloomberg Economics quote)

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