EMEA Snap:Egypt,Revisions to repatriation mechanism pricing scheme

The Central Bank of Egypt announced today changes in the repatriationmechanism pricing scheme by applying a 1% entrance fee while keeping theexit fee constant at 0.5%.

    Exit fees have not changed so the announcement will not affect those alreadyinvested in Egypt. We expect the EGP to gradually appreciate while the CBEaiming to contain risks associated with a surge in FX outflows in the short-termthrough the price revision.

    This change was expected however the timing was not - a revision to the pricingscheme occurring in early 2018was seen to more likely to happen. The CBE isessentially discouraging FX inflows to go through the repatriation mechanism andwould gradually make entry more expensive. The goal would be to direct the FXtransactions to happen via local banks and to gradually increase the role of theinterbank market.

    The CBE seems to be more confident that the interbank market will have thecapacity to address the demand for local currency. They are expecting lessFX flows for portfolio investment in Egypt for the coming year as a result oflower yields on local T-bills. The IMF has been asking authorities to abandon therepatriation mechanism for some time. The mechanism essentially serves as asterilization mechanism allowing the government to be able to have some controlover the value of local currency.

    With this change, an appreciation in the EGP is expected. Officials includingthe President and the head of CBE have indicated in the past several weeks thatEGP will appreciate. With the repatriation mechanism EGP is undervalued sofar. The market reaction today has been to price in the expected appreciation ofthe EGP. As the amount of investments by foreigners maturing overtook new orthe rollover of their investments in the T-bills since early this month, investorsmay be discouraged to exit the T-bill market on the back of riding on gains fromthe EGP appreciation. This will likely leave Egypt in a more comfortable positionaddressing concerns for a surge in FX outflows.