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Sunday, Jan 29, 2023

Egypt’s devaluation ushers in volatility as pound plumbs new low

Egypt’s devaluation ushers in volatility as pound plumbs new low

A plunge in the Egyptian pound signaled a fresh bout of volatility for the currency, with analysts expecting further depreciation ahead.
Following a slide of more than six percent on Wednesday, the pound fluctuated between gains and losses. It fell as much as 2.3 percent to a new low of 27.0481 per dollar as of 1:40 p.m. in Cairo on Thursday. The country’s central bank hasn’t commented on the moves.

The latest depreciation indicates Egypt “secured some external support as a prelude to the move,” Cairo-based Naeem Brokerage said earlier in a note. It expects the pound to weaken by another five percent “in the immediate future, almost closing the gap with a parallel-market rate of 29-30 per dollar.”

The North African country needs to unlock more financing from abroad as it tries to clear the logjam of imports at its ports while foreign exchange remains scarce. Egypt let the pound weaken twice in 2022, eventually clinching a $3 billion loan from the International Monetary Fund with a pledge in October to adopt a flexible exchange-rate.

The “adjustment so far has been significantly more limited compared to the first two devaluations in 2022,” Deutsche Bank AG analysts said Wednesday in a note. In combination with a 300 basis-point interest-rate hike in December, the efforts “clearly show an approach to re-attract (structural) foreign inflows into local markets.”

One of the world’s largest wheat importers, Egypt is grappling with the economic fallout of Russia’s invasion of Ukraine, with inflation near a five-year high. Cairo has also received pledges of assistance from its Gulf allies.

The Arab world’s most populous nation is struggling to clear the backlog of imports, which has reached at least $5 billion, because of a letter of credit requirement. That rule, now revoked, was put in place to conserve foreign currency.

If the pound is freely floated or market-determined through the interbank system, that could spur foreign portfolio inflows in excess of $15 billion into equity and debt by the end of 2023, according to Naeem.

It said the latest steps are likely to unlock $10 billion of direct foreign inflows in “the coming months, about half of that from the Gulf.”

Such funds “would be crucial in securing exchange-rate stability, and would almost completely eliminate the FX liquidity risk overhang that is currently keeping foreign investors away,” Naeem said.

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