(2016-07-26) Bets on Egypt Currency Devaluation Rise Britain isn’t the only country with a troubled pound.
The Egyptian pound fell Monday to its lowest-ever valuation on the unofficial black market amid increasing bets that a weaker economy will force Cairo to devalue its local currency again.
The North African nation’s currency has tumbled in recent weeks and was trading Monday afternoon at around 13 to a U.S. dollar, according to some exchange houses in Cairo. That is sharply lower than the official exchange rate the central bank has kept steady at about 8.88 a dollar since devaluing the currency in March. It traded at about 11 a dollar on the black market at the end of June.
The recent slump in the Egyptian pound’s value on the black market was in part triggered by speculation of an imminent official devaluation after comments earlier in July from Egyptian central bank chief Tarek Amer.
According to local press reports, Mr. Amer said that managing the exchange rate was a “grave mistake” that cost the state billions of dollars over the past five years
The Central Bank of Egypt, or CBE, said in March it would adopt a more flexible exchange-rate policy to help ease an acute dollar shortage that was hurting the economy. It hasn’t done so yet.
Bets on the pound’s devaluation tend to peak ahead of every Tuesday, the day when the central bank holds its usual weekly dollar auction.
Egypt’s economy continues to flounder and the main sources of hard currency for the import-dependent country—foreign investments and tourism—are yet to pick up, thanks to political unrest since the uprising in 2011 and a spate of terror attacks. Remittances from Egyptians working overseas have also dropped in recent months.
A devaluation of the pound would boost foreign investors’ confidence and increase the Egyptian market’s competitiveness. It would also help reduce the strain in the balance of payments; Egypt’s current-account deficit widened to more than 5% of gross domestic product—the largest shortfall since the early 1980s, according to Capital Economics.
Egypt doesn’t officially peg its currency to the dollar but its central bank actively manages the exchange rate.
By adopting a more flexible exchange-rate policy, the country would join other emerging market nations abandoning pegs to the greenback. Nigeria’s central bank last month dropped its currency peg, which had long been blamed for exacerbating a slide toward recession in Africa’s largest economy.
Egypt’s foreign reserves amounted to about $17.5 billion at end of June, about half of what the country had before the 2011 uprising and just about enough to cover three months of imports. Aid from its Persian Gulf neighbors has also slowed, as those countries cope with the impact of cheap oil on their petrodollar-fueled economies.
“The central bank needs to build a decent liquidity buffer to stabilize the FX market post any devaluation,” said Mohamed Abu Basha, an economist at EFG Hermes. This is necessary to gradually redirect FX flows away from the parallel market and into the banking system, eventually attracting capital inflows, he said.
Egypt is said to be in talks with the International Monetary Fund for a multibillion-dollar loan and is expecting some funds from its Gulf allies as well.
The country also has to contend with soaring inflation. A weaker currency will improve Egypt’s longer-term prospects but is also likely to result in higher prices, which the country can ill-afford. Since March’s devaluation, inflation has jumped to nearly 14% in annual terms in June.
“Inflation is a factor especially in light of the awaited implementation of Value Added Tax which is expected to push price levels up,” said Hany Farahat, senior economist at Cairo-based CI Capital. The new levy, currently discussed in parliament, is expected to be implemented in the coming months.
Higher inflation means the central bank will likely raise interest rates again. It increasedkey rates to a multiyear high in June, the second raise this year. The central bank’s monetary policy committee is scheduled to meet again later this week.
Last week, state-run media quoted Mr. Amer as saying that while floating the pound wasn't possible for now, a devaluation “will happen when the bank sees the time is right.”
“The latest comments from policy makers suggest that it is a question of when, not if, the currency will be allowed to weaken,” said Jason Tuvey, a Middle East economist at Capital Economics, adding that he expects the pound to fall beyond 10 to the dollar next year.
