Inflation is running rampant in Egypt. As the Egyptian pound (EGP) becomes inflated, companies are updating their prices and cutting back on output, thereby slowing the flow of goods. They cannot get banks to exchange EGP for USD — banks do not want to make the currency conversion due to the currency risk (1 EGP = .05 USD at the time of publication) — and they have no access to outside markets.
The Central Bank of Egypt (CBE) does not have enough currency reserves, which provides foreign countries with no reassurance of their ability to trust in the Egyptian economy. All this makes for a unique situation where a company’s best position is to cut back on production, lay off staff and cut costs, leaving many small businesses shuttering their doors in this emerging market.
According to Reuters, “Egypt has seen billions of dollars leave its markets since the Russian invasion of Ukraine in February as investors have fled emerging markets for safer havens.”
Tom Hunt, AFP’s director of Treasury Services and Payments, recently sat down with members of the Middle East and Africa treasury council to discuss their reactions and experiences with the situation in Egypt.
One treasury professional said the Egyptian economy is in a dire situation. He said it’s not currency price that’s an issue, as his company originally anticipated, but rather liquidity — specifically EGP to USD. While his company had foreign currency available, the Central Bank had not granted that same authority to their suppliers, which means they had to stop doing business as no goods or services could change hands without a common currency. “Companies are reducing outputs and relying on the Central Bank to provide access to currency. And until then, the economy is in a dire situation,” he said.
Another professional said one’s ability to find a solution really hinges on the strength of the company’s banking relationships. For his company, which operates in Saudi Arabia, they were able to partner with their bank to create a three-way transfer of funds involving two third parties. The company would pay EGP to one third-party entity, then another third party the bank found would pay in Saudi Riyal (SAR). In essence, the bank played intermediary to offset the EGP with SAR for the same amount in both currencies for his company.
“Hot money leaves the market quickly when times get tough,” said another professional. In this case, the theory of supply and demand is not working; raising prices has actually led to higher demand, which puts more pressure on foreign currency requirements. And the market is unable to absorb the interest rate hikes initiated by the Federal Reserve. What’s happening now is that acquisitions are putting additional pressure on local markets, i.e., companies with USD are able to buy Egyptian companies at a discount.
Another perspective offered was in regard to the repatriation of funds. Dividends need to be paid, but there are no funds to pay the dividends, and Egypt cannot participate in the pooling process being run as part of an in-house bank and pooling system due to the level of risk and lack of available currency to trade USD.
Since he started working in finance, there has never been a situation wrought with such a high level of uncertainty as this, said another treasury professional. He said it is beyond anything they’ve been through and beyond the capabilities of the (Central Bank of Egypt) CBE, adding that the war in Ukraine is adding further pressure to the global economy. Industry-specific answers, as opposed to general ones, are what they’re looking for, he said.
“It’s a vicious cycle of inflation, rate increases and forex devaluation,” said another. And all of it is impacting consumers’ ability to purchase cars, homes and other goods. Along with that, due to the uncertainty of inflation rates, developers are slowing their sales with the understanding that rates will potentially decrease in the future due to the fact that the cost of construction is expected to rise.
What caused this to happen in the Egyptian market? “Inflation, increasing rates, pressure on central banks, and the increased costs of funding,” said one treasury professional. “Each country has its own challenges, in addition to contending with the availability of the dollar, which puts pressure on the consumer in all sectors.”
Has anyone made use of credit and debit cards in this situation? Visa, Mastercard or American Express has access to convert to USD? The use of credit cards really depends on the industry, said one professional. For his company, his clients would need very large credit lines, making this solution impractical. However, for other professionals Hunt spoke with, it has helped in terms of paying vendors.
One professional said they use Amex to pay vendors with a 55-day credit cycle. Inflows come through Amex, and a fair rate is provided. While you can negotiate your inflows pricing to offset outflows, another professional said he has found it difficult to get good pricing and available credit.
Another company uses the International Air Transport Association (IATA) as an intermediary with the airline industry — 70-80% of their inflows come through IATA. He said it’s very safe for the other party should an agent default.
Technology has been the default for another professional and his company when it comes to forex. They use J.P. Morgan as their live trading platform, and when they see the live price, they trade quickly. “Pricing is pre-determined based on currency,” he said. “It’s a good solution.” But it also reiterates what was said earlier: It comes down to the strength of your bank relationships to find solutions in these challenging times.
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