Egypt | When hot money is not so hot

Portfolio inflows have become a lifeline for Egypt's external position, so much so that their sudden reversal poses a serious threat to foreign reserves.

What you will learn:

  • Adverse movements on the balance of payments have resulted in Egypt becoming almost solely reliant on portfolio inflows and external borrowing to fund its external position.
  • A gradual shift towards global tightening would see a moderation in Egyptian asset demand, as is shown in our baseline. But Egypt’s external position could be in big trouble should any sudden shifts in EM sentiment trigger market volatility and lead to an unexpected reversal in portfolio inflows.
  • A sudden drop in foreign reserves could force the Central Bank of Egypt to stop intervening in the currency market – and fast-track the move towards a flexible currency regime (not a bad development), but this would also result in an uncomfortable depreciation.

Topics: Emerging markets, Monetary policy, Africa, Foreign exchange, Egypt, EM sentiment, Foreign Exchange shortage, Global monetary policy tightening, Liquidity risk, US Fed

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