High-yield bank accounts hint at new strategies for incoming Central Bank governor

A batch of new high-yield accounts offered by Egypt’s state owned banks represent a bid by the government to curb inflation, ease demand for the dollar and shore up the Egyptian pound, experts say. They also suggest an increased level of coordination between the state owned banks, the Cabinet and the Central Bank.

On November 8 — just weeks after outgoing Central Bank Governor Hesham Ramez announced he would be replaced by Tarek Amr — Egypt’s two largest government owned banks launched savings vehicles with a 12.5 percent interest rate. The National Bank of Egypt and Banque Misr, who together hold roughly 45 percent of deposits, are offering the three-year savings certificates in units of LE1,000, yielding a fixed annual rate and regular monthly payments.

State-owned Banque Du Caire and the private Societe Arabe Internationale Bank soon followed suit.

With average yields for savings accounts and certificates of deposit (CDs) in Egypt at around 10 percent, the new accounts, unsurprisingly, proved popular.

“Within the last seven days, they collected more than LE35 billion, and maybe we will have more in the coming few days,” said Cairo University economist Fahkry al-Fiky, speaking at a Monday conference on monetary policy.

In addition to the high interest rate, the relatively short three-year deposit term makes the new CDs popular, Fiky explained. “It’s very attractive to most of the Egyptians, especially retirees,” he said.

Paired with the recent move by the CBE to strengthen the pound’s official exchange rate, Fiky sees the new high-interest accounts as part of a strategy to change public perception of the pound as a sure loser against the dollar. “They do another signal to the people, in the market, that says: ‘The Egyptian pound? We are reversing your expectations,’” he explained.

“This is to stop dollarization, that’s the main purpose,” Fiky said. “Of course, those who have dollar accounts, they won’t, say, convert it into Egyptian pounds. They won’t, of course.”

Dollar-denominated CDs yield much lower returns — most 3-year certificates from local banks yield interest rates in range of 3.5 to 4.5 percent — but people who save in dollars benefit every time the dollar rises against the pound, so the new CDs won’t necessarily be enough to induce people to change their dollars to pounds. However, Fiky said it might be enough to sway people who are deciding what to do with assets held in pounds.

“Those who were planning to convert it, and dollarize their deposits, they will start to rethink their position, and say ‘how about we keep it because it gives us 12.5 percent and we see the payments on a monthly basis,’” he said.

Whether this policy underlying the new accounts will be successful, regardless of how well it is coordinated, remains to be seen.

In addition to trying to stop dollarization, Yasmine Abdel Razik, a member of President Abdel Fattah al-Sisi’s economic development advisory council suggested that the government is hoping to ease inflation by locking money away in savings accounts rather than having it circulate through the marketplace.

The new CDs have been enthusiastically received by the public, but that doesn’t necessarily mean much money is truly being taken out of the market, or being converted from dollars: much of the funds going into the new accounts is likely shifted from existing LE-denominated savings accounts into new ones.

“The question that is still to unfold in the next coming weeks is: what’s the amount of money that has been taken away from circulation?” she said, speaking at the same conference. “Because definitely some of the new CDs are just transfers from old savings into new vehicles. So this might not solve the problem too much.”

A shift in relations with the CBE

The way in which these new savings vehicles have been introduced suggests the Central Bank’s new leadership will better coordinate policy with the cabinet and the public-sector banks.

The NBE and other public banks offered the new, higher interest rate to their customers without being pushed to do so by a change in the Central Bank’s interest policy, and without a corresponding increase in the interest rates those banks charge the government when they loan it money by buying treasury bills and bonds.

On November 9, the day after the new CDs were announced, there was only a marginal rise in the interest rate banks demand from the government when they loan it money by purchasing treasury bonds and bills. Five-year bond yields were barely inching up to 13.167 percent from 13.163 a week earlier. By November 25, they were up to just 13.173.

This disconnect between consumer interest rates and bond yields runs counter to conventional wisdom in monetary policies. There is a delicate interplay between Egypt’s Central Bank, state owned banks like the NBE, and the Ministry of Finance. The bulk of Egypt’s domestic debt, which exceeded LE2.1 trillion as of June 2015, is held in the form of treasury bonds and bills owned by local banks. The interest the government has to pay on those bonds has a huge effect on overall government spending.

“Interest payments in the budget for 2014/15 constitute basically 25 percent of the total expenditures. In the budget 15/16, it’s expected to be 28%. So on such big debts, a one percent increase in interest rates is going to affect the borrowing costs of the government tremendously,” Abdel Razek explained.

Meanwhile, the CBE controls the basic cost of doing business for banks, and by extension the interest rates banks offer to customers, by setting the interest rate at which banks borrow and loan money to each other.

This means that when the CBE raises interest rates — a common tactic to flight inflation — it is expected to have a knock-on effect on the government’s debt service burden.

This is what happened in July 2014, when the CBE raised its rates by 1 percent, catching many bankers by surprise. “Everybody woke up in the morning and found it,” Abdel Razek said of the CBE’s interest rate hike. “This immediately has increased the cost of debt. The very second day, the cost of the government’s debt increased by more than 1 percent.”

This time around, that hasn’t happened. So far this month, the national banks have been willing to pay out more interest to depositors without passing along the costs to the government. “Even though the interest rates on some of the savings vehicles has increased 1 percent, policy rates have remained the same and the budget and the costs of borrowing for the government is still not touched,” Abdel Razek said.

In other words, public sector banks have started offering higher interest rates without an obvious reason to do so: The CBE’s benchmark interest rates have remained unchanged since January, and interest rates on bonds are holding steady.

The absence of a clear rationale for the change in consumer interest rates has led analysts to speculate that the public-sector banks are acting in anticipation of an as-yet-unannounced shift in policy under the new Central Bank governor. Tarek Amer, who spent most of his career working in Egypt’s public sector banks, does not officially take office until November 27, but is widely believed to be behind recent shifts in policy.

“He used the national banks to apply policy,” said Ibrahim Mostafa, an advisor on government and economic affairs at accounting firm PricewaterhouseCoopers, on the sidelines of the conference.

Fiky, along with other analysts, suggests the Central Bank is likely to raise interest rates in the near future. If this happens, it will bump up bond yields, meaning that the interest the banks are earning on the money they loan the government will once again exceed the rates banks are paying to depositors. However, this cannot happen before December 17, the next scheduled meeting of the CBE committee that sets benchmark interest rates.

The public sector banks, it seems, are willing to act against their financial self-interest, at least in the short term.

“This means the Central Bank has some coordination with the Ministry of Finance and with the other banks in order to maintain the cost of the borrowing with the government,” Abdel Razek said. If such coordination did not exist, she says, a 2.5 percent increase in the interest the National Bank of Egypt offers to depositors would have immediately translated to a 2.5 percent increase in the interest the NBE demands when it lends the government money.

Isabel Esterman 

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