Egypt offers savings certificates with record returns.. Will it succeed in confronting inflation? | Economy

Cairo- I continued Egypt Offering savings certificates with a record annual return, through the two largest government banks for the third time, as an extension of what they have done since March 2022 with the beginning of the economic crisis in the wake of the Russian-Ukrainian war.

The Bank of Egypt and Al-Ahly Bank issued two savings certificates for one year with a return of 23.5%, disbursed monthly, and 27%, disbursed at the end of the period after a year, coinciding with the maturity date of the certificates of deposit with a return of 25% issued in the same period last year, with a value of about 500 billion pounds ($16.3 billion).

The first time was in March 2022, when certificates were issued with the highest annual return at that time, amounting to 18%, in conjunction with a sudden interest increase by central bank By 100 points for the first time in 5 years, and the value of the pound was reduced by 16%.

The goal at the time of these economic measures, which were described as painful and necessary with the exodus of foreign investment capital amounting to more than $20 billion, was to curb Inflation Supporting economic activity, and not hedging by purchasing dollars by absorbing liquidity from the hands of citizens, and the certificates succeeded in collecting 750 billion pounds (about 41 billion dollars at the price of the time), according to the Central Bank of Egypt.

How did high interest rates turn negative?

But analysts and economists concluded that these measures did not achieve their goals, as inflation in Egypt at the time was 8.8%, while it is now 36.5%. The pound fell against the dollar and is now trading at 53 pounds in spot parallel market transactions, and interest has risen to 20% now. .

The two state banks’ one-year savings certificate interest rates of 27% do not reflect the central bank’s interest rates of 19.25%, 20.25% and 19.75% respectively, but are still below the inflation rate of 36.5%.

In 2022, the Central Bank of Egypt raised interest rates by 300 basis points and about 800 basis points during 2023, in an attempt to absorb the wave of inflation.

Decline in investment in new savings vehicles

The real interest rate in Egypt is the nominal interest rate (27%) minus the inflation rate (36.5%), meaning it is still at negative 10% if the interest is disbursed at the end of the period, or at negative 14% if the interest is disbursed monthly.

This 27% savings pool represents an opportunity for those who prefer not to risk their money outside the official banking pools, as the highest interest rate now on savings certificates is about 19% for a period of 3 years.

But this percentage of those looking for stable investment began to decrease every time new savings certificates were offered at higher, higher prices instead of increasing, for the main reason that is the erosion of those annual profits in exchange for the increase in prices and high prices and the doubling of profits in other savings outlets that require a kind of liberalization. From the image of traditional investment.

In the first offering in 2022, the two government banks raised 750 billion pounds (about 41 billion dollars at that time’s price), and in the second offering in 2023 they raised only 470 billion pounds (about 19 billion dollars at that time’s price), after many people refrained from continuing to save their money. In savings pots.

Those who are reluctant to continue investing in savings certificates have taken three parallel paths, which are as follows:

• Investing in gold as a safe haven, as it rose within a year from 1,700 pounds per gram of 21 carat to 3,200 pounds, an increase of 89%.
• Hedging by purchasing the dollar, which increased from 31 pounds to the dollar within a year to 53 pounds, an increase of 69%.
• Investment in real estate increased at varying rates depending on the type and location of the property, but generally increased by about 100% or more.

Absorbing liquidity and retaining depositors’ funds

In his appreciation for this step, banking expert Mohamed Ali says, “The launch of new savings certificates by the National and Egyptian Banks aims to absorb the liquidity resulting from the markets due to the maturity date of the 25% certificates that expire these days, and thus not to increase the high inflation rates, as well as retaining funds.” Their new depositors.

Speaking to Al Jazeera Net, he believed that the volume of liquidity (about 500 billion pounds) if you do not find a new savings pot with a higher interest may turn to other non-banking paths, such as buying gold or the dollar as a type of investment, and there will still be a segment that prefers safe and stable savings.

But he considered the decision to invest in gold or the dollar this time different from previous times, even though it had proven successful previously, because the dollar and gold are at their highest historical level, and therefore should the amount of risk be calculated in entering at these prices?

The banking expert pointed out that the options for turning to gold, the dollar, or real estate are governed by future conditions, especially since the state may take measures to limit these increases, and thus the savings pool in certificates of deposit of 27% may become the best.

The government is walking a fine line between depreciating the pound and increasing the dollar

Financial markets expert Wael Al-Nahhas considered that “the goal of raising the interest rate on the new certificate is to continue keeping depositors’ money and not go out to the markets and buy gold, dollars, or commodities, and to prevent speculation in the markets to exploit that liquidity.”

Speaking to Al Jazeera Net, Al-Nahhas explained that this savings pool is temporary for a year, and is subject to developments in economic conditions, and a large portion of depositors’ money goes to invest the Banks of Egypt and the National Bank in local debt instruments offered by the Central Bank on behalf of the Ministry of Finance to finance the budget deficit, and it is approaching… 27%.

Exposure to government debt instruments (their possession) led to a downgrade in the rating of the four largest government banks in Egypt, and last November, Fitch agency downgraded the rating of the National Bank of Egypt, Banque Misr, and Cairo Bank, as well as the private Commercial International Bank, to “minus B.” (-B) from “B” with a stable outlook.

The economic expert explained that a large portion of depositors depend on the proceeds of these certificates for their livelihood, and it would have been better to extend the duration of these certificates to at least 3 years, so that there is a kind of balance and reinvestment of this money, and not re-inflationary industry by exploiting it in debt instruments. Government, especially since the size of the budget deficit is huge.

Regarding the possibility of devaluing the pound (30.9 pounds to the dollar), Al-Nahhas expected it to happen at the level of the central bank and local banks’ rates, and not at the black market level in the event that the central bank maintains dollar liquidity that enables it to meet market demands instead of resorting to the black market. If the situation remains as it is, we will see new heights here and there.