November 28, 2018 / 6:24 PM / 14 days ago

CORRECTED-UPDATE 1-Egypt to end dollar-guarantee mechanism for foreign investors

(Corrects paragraph 11 to say .. capital inflows, current account deficit ..not.. reserves, budget deficit)

CAIRO, Nov 28 (Reuters) - Egypt’s central bank said on Wednesday it will end on Dec. 4 the use of a mechanism guaranteeing that foreign investors wanting to sell out of Egyptian securities could pull out their money in dollars, in a move to loosen its grip on investment flows.

Egypt put the mechanism in place in March 2013 to ensure foreign investors would have access to foreign currency when they chose to withdraw from local securities. But analysts said its continued use had distorted the market.

Hany Farahat, senior economist at Egyptian investment bank CI Capital, said the decision was a positive step.

“There is a supply/demand distortion that has been resolved by cancelling the repatriation mechanism. The ring-fenced inflows of portfolio investors are actually now going to reflect on the interbank market and on banks’ net foreign assets,” he said.

“Adding the supply side of the foreign currency, the amount of money that used to come in via portfolio flows is going to be EGP-supported, so it will help the exchange rate and will allow more volatility,” Farahat added.

The central bank said in a statement that the decision covers “any fresh foreign currency portfolio investments wishing to enter the local currency Egyptian T-bills, T-bonds market and stocks listed on the Egyptian Stock Exchange”.

The move takes effect at the close of business on Dec. 4, it said. It also said investors who entered the market via the mechanism before Dec. 4 could still leave using it at any time.

The mechanism “was heavily utilised by foreign investors at the initiation of the liberalisation in order to guarantee liquidity”, the central bank said.

Egypt floated its currency in November 2016 and implemented several economic reforms as part of a $12 billion loan deal with the IMF.

“Two years from that date, this regime has led to the successful elimination of all foreign exchange shortages that previously disrupted economic activity,” the central bank said.

It said Egypt’s foreign currency capital inflows since Nov 3, 2016 had reached a total of $111 billion and that the current account deficit had narrowed from 5.9 percent of gross domestic product in fiscal 2015/2016 to 2.4 percent in 2017/2018. (Reporting by Yousef Saba; Editing by Hugh Lawson and Alison Williams)

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