‘Hot money’ leaves Egyptian debt instruments 10 times in 16 years

In the wake of the Russian invasion of Ukraine, there has been a major exit of foreigners from the instruments of the Egyptian government debt, estimated by unofficial sources to be about $15 billion. This is happening at a time when commercial Egyptian banks are suffering, since last July, a continuous foreign currency deficit as a result of which monetary authorities were forced to reduce the rate of exchange of the Egyptian pound, increase interest rates as a prelude to effecting further increases, offer external bonds as a prelude to further offerings, obtain a supporting Saudi deposit, put up Suez Canal passage fees and reduce the consumption by government-owned power plants of natural gas so as to save it for exports. Yet, despite all of this, Central Bank reserves of foreign currency went down by about $4 billion during last March.

This led to heading for the IMF in order to obtain a new loan and to request regional and international banks to provide other loans. It also led to expanding the sale of government assets for Gulf investors, whether from the UAE, Saudi Arabia or Qatar, as well as the sale of properties and housing units, including plots of lands for the use of expatriate Egyptians as graveyards, with the purpose of acquiring more dollars.

Egypt expanded the reliance on “hot money” in order to bring dollars for the Egyptian market, despite the enormous cost involved, due to the high interest rate in the instruments that attract them throughout the terms served by Farooq Al-Uqdah and Tariq Amer as Governors of the Egyptian Central Bank. The term served by the former lasted nine years, between 2003 and 2013, while the term of the latter lasted up to the present, for six years. He has been in his post since 2015.

Violent departure five times, one of which for six years

During that period, and from the statements of foreign purchases of Egyptian treasury bills, as a government debt instrument in addition to treasury bonds – considering that government agencies have not published anything about foreign purchases of treasury bonds – the last six years, since 2006 up to this year, have witnessed five times during which foreign exit was quite violent away from their purchases of treasury bills, in addition to other five instances of less intense exit.

“Hot money” pursues opportunities for higher profits in evolving markets, whether through the existence of high interest rates or profit opportunities in evolving stock exchanges, disregarding the risks in those countries, where they locate the profit ratios commensurable with such risks. The moment the level of risks – whether political or social – increases, or when the benefit from the profit ratio allocated declines, such “hot money” rushes out in pursuit of other markets deemed more profitable.

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For this reason, the late Professor of Financial Management, Dr Munir Hadi, named them “the flying bird”, or “the bird that only makes a very brief stop on a tree branch to feed and then flies to another tree”, so as to repeat the same accomplishment. It is, in this way, that “hot money” comes to Egypt in order to benefit from the high interest rate on Egyptian government debt instruments. However, it soon left with the onset of the global financial crisis that hit during the period from 2008 to 2009.

In the wake of the 25 January 2011 revolution, the money left Egypt and remained outside until around the end of 2016, for six continuous years. It only returned after the Egyptian pound was floated in 2016. Then, in 2018, with the onset of the US-Chinese trade war and the decline of the interest rate in Egypt, it left for eight months. Then, in the wake of the outbreak of the Corona virus, it exited once more, and did the same thing again in the wake of the Russian invasion of Ukraine.

Annual benefit in excess of $11 billion

The other five less intense exits took place in 2006, for a period of two months; in 2007 for a period of three months; in 2010, in May, and then during the last three months of the year, in the wake of the parliamentary elections that resulted in an almost total control of all seats by the ruling party; in 2019, for two months because of the demonstrations that were staged during September; and, in 2021, during four different months, influenced, in particular, by the announcement of the US Federal Reserve that it intended to put up interest rates.

Every time, its exit influences the rate of exchange of the Egyptian pound, as well as foreign currency reserves, depending on the intensity of the exit itself. When the supply of foreign currencies declines, the authorities often reduce the rate of exchange of the Egyptian pound or put up the interest rate to levels above those in other competing evolving markets so as to attract the “hot money”, once again. Or, they may resort to borrowing more in order to make up for the lack of dollar liquidity as a consequence of the exit of “hot money”.

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The enormity of the cost of “hot money” is highlighted by the increase in investment payment incomes in Egypt, from $1.7 billion in 2006 to $9.6 billion in 2018, and then up to $11.6 billion in 2020. They reached the sum of $11.4 billion during the first nine months of the last year, according to the latest data released. This means they are likely to reach $15 billion by the end of the year, including interests on foreign loans.

Such cost has impacted on the Egyptian budget, whereby government debt interests now constitute the biggest item in the budget expenditure, at 37 per cent of the total. This consequently impacts on the share of the other five budget expenditures, especially investments, subsidies and salaries.

“Hot money” dictates monetary policy

The value of such funds entices those in charge of monetary policy, in that it helps them boast about the stability of exchange rate and the desire by foreign investors to invest in government debt instruments and funding government imports, whether in the food or energy sectors or even in security.

The figure of $33 billion was exceeded last August. By contrasting that figure with the figure of the foreign currency revenues in the Egyptian balance of payments during the last fiscal year 2020-2021 that ended last June, we find that remittances of Egyptian expatriates reached the value of $31 billion. The net commodity exports were less than $29 billion. The amount used out of foreign debts is about $13 billion, while the net direct foreign investment is $5.2 billion and Suez Canal revenues are $5.9 billion.

This is what encourages them to risk continuing to attract such “hot money”, despite their realisation of the potential risk. After all, the money soon exits, whether for internal or external reasons. Such sudden departure causes additional problems for an economy that is already burdened with hardships.

In fact, monetary policy has become hostage to this “hot money”. When determining the interest rate, monetary authorities have their eyes set principally on satisfying this “hot money” by putting up interest rates, despite the damage this incurs upon local industries and exports, as well as on the competitiveness of such exports vis-à-vis the exports of other States. The same thing happens when determining the rate of exchange, whereby the rate deemed appropriate by these authorities becomes the benchmark for the Central Bank.

Fiscal policy follows suit, whereby tax discrimination is practiced in favour of foreign transactions at the stock exchange in an endeavour to entice them to come back, their having left during the past three years and even during the first few months of the current year.

Translated from Arabi21, 10 April 2022

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.