The exit of hot money was one of the most important reasons for the scarcity of foreign exchange during periods of tension, and the recovery of the black market for foreign exchange (Reuters)
Following the revolution of January 25, 2011, a lot of foreign investors’ money, which was working in local government debt (bills and bonds) amounting to about $8 billion, left, and in the years 2018, 2020 and 2022, the same thing was repeated by foreign investors, and this was one of the The most important reasons for the scarcity of foreign exchange during those periods, and the recovery of the black market for foreign exchange.
The most harmful exit of these funds to the exchange market in Egypt was what took place after the Russian war on Ukraine, specifically after April 2022, when funds went out to foreign investors working in Egyptian government debt amounting to between 18 and 20 billion dollars.
But in June 2022, Egyptian Finance Minister Mohamed Maait said, during his meeting with the Egyptian-American Chamber of Commerce: “The lesson we have learned is that we cannot rely on hot money, because it comes only for the sake of high returns... Egypt must learn the lesson, it must not "You can depend on that money. If it comes again, we have no problem."
What is hot money?
Hot money is the most prominent form of indirect investment, as it comes to buy bills and bonds related to government debt, seeking a higher interest rate in one market, and not in other markets, to benefit from the interest rate difference.
It is usually characterized by rapid entry and exit from the markets, which creates a state of confusion, especially when it exits, because of the pressure it creates on the demand for foreign exchange.
It is also found in the stock and bond market, which does not stipulate time periods for buying and selling operations, and the circle may expand to include the presence of hot money in the field of rapid speculation, such as gold, foreign exchange, or commodity exchanges.
Creating the climate for the return of hot money
But nearly two years after the minister’s statements, specifically on March 6, 2024, Egypt took decisions related to raising the interest rate and reducing the value of the pound, which made it highly likely that hot money would return to Egypt, as these funds are betting on these two things for their presence in any market. It raises the interest rate and lowers the value of the local currency.
According to Bloomberg, Egypt has the third highest return on treasury bills and bonds in local currency among 23 developing countries tracked by the agency.
According to the same agency, on March 7, Egypt sold treasury bills worth about 87.8 billion pounds ($1.78 billion) at an interest rate of 32.2%.
Major investment institutions working in local debt contributed to purchasing the March 7, 2024 bills, and among these institutions are (Goldman Sachs, Citibank, and Morgan Stanley).
Given that Egypt’s way out of its economic and financing crisis in March 2024 came through unsustainable sources, such as the “Ras El Hekma” deal, increasing the value of the International Monetary Fund loan, or obtaining some foreign loans, it is appropriate for Egypt to deal with caution in... In light of its previous negative practice, and in light of what the Minister of Finance, Dr. Mohamed Maait, stated that they have learned their lesson, and that this money should not be relied upon.
The opportunity offered by hot money
In the case of Egypt, it was noted that its foreign exchange resources were always less than its needs, and this is what we see from the data on the merchandise trade balance, which usually results in a deficit, which has been continuing for years, and the largest value of this deficit was during the past ten years, in the year 2021-2022, reaching $43.3 billion.
Its sources of foreign exchange are mostly rentier sources, such as revenues from the Suez Canal, oil exports, revenues from the tourism sector, and remittances from workers abroad, and these sources are almost always exposed to regional and international threats.
This made resorting to hot money one of the resorts that Egypt adopted to work to stabilize the exchange rate. Farouk Al-Aqd’s tenure as governor of the Central Bank witnessed an expansion in the use of this mechanism, as the consequences of Egypt’s external debts were limited, and the financial policy at that time was not concerned with the value of... and the size of domestic debt.
However, the expansion that took place after 2016, and the agreement reached with the IMF, led to reliance on hot money to reach what the government sees as stability in the exchange rate.
Therefore, the value of the dollar fell after the use of hot money, according to the data of the Ministry of Finance’s monthly report for December 2023. The average exchange rate in 2017 was 17.8 pounds to the dollar, and it reached an average price of 15.6 pounds to the dollar in 2021.
The only opportunity offered by the return of hot money to Egypt during the coming period is to cause an increase in the supply of foreign exchange, which will help improve the exchange rate of the pound against foreign currencies.
But this is conditional on the government’s good performance of its foreign exchange resources, especially since the International Monetary Fund’s conditions are for Egypt to leave the exchange rate to the mechanisms of supply and demand, and for the government to view these funds as an exceptional tool that cannot be relied upon, and to dispense with them as soon as possible, because Its burdens on the public debt on the one hand, and on the other hand, it is characterized by instability or sustainability.
Caveats and more
Economists generally view hot money as not representing a real investment, as they are indirect investments and are not directed towards real production. Therefore, Egypt’s need, as a developing country, is to attract direct investments that are characterized by stability, work to increase job opportunities and exports, and introduce new technology. It also contributes to the process of pumping foreign exchange from abroad into the arteries of the national economy.
The other thing is that Egypt’s situation in the public debt index is worrying, whether it is domestic or foreign debt, as the debt burden on the budget during the past years has represented a heavy burden, as it has the largest allocations to spending items in the general budget.
In the latest statistics from the Ministry of Finance, debt interest during the period (July 2023 - January 2024) amounted to 962 billion pounds, while total public revenues amounted to 951 billion pounds, meaning that public revenues are unable to pay debt interest only.
Therefore, every additional burden on the debt interest bill - even if it is small - is stressful for the state’s financial situation.
Hot money will add a burden on foreign exchange resources, because it seeks at the end of each period to extract the interest it earned on its money, and according to the latest data for Egypt’s balance of payments in the fiscal year 2022-2023, investment payments to foreigners amounted to $19.4 billion, and thus the presence of money will The hot spot in Egypt has two roles, the first can help stabilize the exchange rate, and the second can help bleed foreign exchange abroad.
Lack of government vision
There is no doubt that the issue of hot money is worrying for everyone, especially for developing countries, which seek to end their economic problems and seek economic stability, and one of the most important problems of economic instability is the presence of hot money.
As usual, the government has not announced a program to deal with the current economic crisis, especially after a funding breakthrough that came entirely from abroad. What is required is for the government to present a vision that includes all the details to the economic partners, from the business community, the family sector, and civil society.
Especially with regard to hot money, what is the government’s program towards this money, in terms of targeting the required amounts of this money, how to deal with it, and when to dispense with it, as well as determining the value of the interest bill that can be borne in light of the presence of this money in Egypt.
Unfortunately, the existence of these funds was known through foreign sources, and the Central Bank’s data on these funds comes at least 3 months late. What is required is more transparency about the economic conditions in Egypt, in a way that makes the investment climate more attractive to Egyptians and foreigners.
Source: Al Jazeera