Egypt faces another devaluation, predict experts

Reuters/Shokry Hussien

• Condition of $3bn IMF loan was Egypt moves to flexible exchange rate
• Analysts say devaluation is more likely than floating the pound
• Local businesses struggling to access hard currency

Economic analysts are predicting that the Egyptian government will be forced into a fourth devaluation of the Egyptian pound since February last year although uncertainty surrounds its timing and magnitude.

Ramona Moubarak, head of Mena country risk at Fitch Solutions, cited sluggish capital inflows to Egypt and a growing parallel currency market due to persistent foreign exchange shortages as factors which are likely to force the government to act. 

Moubarak told a webinar last week that the authorities’ defence of a peg at EGP30.9 to the dollar since March “goes against their commitment towards a durable exchange rate under the current International Monetary Fund (IMF) programme”.

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The programme’s first quarterly review was due on March 15 but has been pushed back. A new date has not yet been announced.

A central condition of the $3 billion IMF loan agreed in Egypt was that the country move towards a flexible exchange rate.

Jihad Azour, IMF director for the Middle East, North Africa and Central Asia, told a press conference on April 13 that “the flexibility of the exchange rate is the best way for Egypt to protect its economy from external shocks.”

Egypt has long resisted calls to float the pound and analysts say that a one-off devaluation is more likely.

Farouk Soussa, Mena economist at Goldman Sachs, said consistent downward pressure on the pound has created a cycle whereby the Central Bank of Egypt (CBE) pegs its value to the dollar, and allows its value to drop only when a parallel exchange market begins to grow, “almost like a crawling peg rather than a fixed exchange rate”.

“Egypt’s inflation rate runs pretty hot compared to other trading partners,” said Soussa. “This makes it difficult to float the pound. The government doesn’t want a constantly weakening currency.” 

Government under pressure from local businesses

Yet the government is facing pressure from Egyptian businesses struggling to access hard currency.

Amid a foreign currency shortage, the dollar is now trading at around EGP36 on the parallel market. More than from the IMF, “pressure is coming from locals and the need to import,” said Soussa. “That’s what’s driving the pound lower.”

Moubarak said that Fitch Solutions expects a devaluation to follow progress on Egypt’s privatisation drive.

In February the government of prime minister Moustafa Madbouly announced that it would float 32 state and military-owned companies on the Egyptian Exchange (EGX) but has subsequently offered no stakes and announced no sales.

There have however been numerous discussions between privately-owned domestic investors and prospective foreign buyers, many of whom come from the Gulf.

“The holy month of Ramadan led to some stagnation in the process, but we will see some activity after Eid Al Fatr,” said Moubarak. “This will allow the authorities to weaken the currency and attract some foreign exchange (FX) inflows”. 

But the strategy of waiting for foreign investment to strengthen the Egyptian pound before devaluing could be “putting the horse before the cart”, according to Soussa, who said that buyers could be waiting for the next round of devaluation before making a move.

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“Foreign investors are saying: ‘We need to be sure that the pound has bottomed out before we invest’,” said Soussa.

“They can hold off the move until they have the FX inflows. But if they then don’t get those FX inflows, it will imply a big fall in the value of the currency.”

There is evidence that the market anticipates a sharp devaluation of the pound over the next six to 12 months.

Earlier this month depository receipts – internationally listed shares – in Egypt’s largest listed bank, CIB, traded at a record discount of 36 percent to the shares in Cairo.

Data compiled by Bloomberg showed speculators shorting the pound at around EGP43 to the dollar, projecting that the pound could lose just under a quarter of its current value over the next 12 months.

However, Gergely Urmossy, emerging markets strategist at Société Générale, said that such predictions are overly pessimistic.

“The central bank is too conscious of the inflationary impacts to let the pound drop too far,” he said.

The pound has already lost over half its value since the outbreak of war in Ukraine, contributing to inflation that currently sits at 33 percent.

Some estimates say that the number of Egyptians living below the poverty line has risen to nearly 60 percent.

To counteract inflation, the CBE has doubled interest rates over the past year. Many analysts now predict that the overnight deposit rate could soon reach 20 percent for the first time.

On Sunday the finance ministry said that it would be raising subsidies by 48 percent for the financial year 2023-24 to EGP529.7 billion ($17.1 billion).

Urmossy said that an announcement of a further devaluation would serve to reassure investors by aligning policy with the IMF’s conditions.

“There are a lot of negative views about the outlook of the pound right now,” he said.

“The way to break that and create a more constructive conversation is for the government to show real progress in its commitments towards the IMF. This could be a significant catalyst for the economy.”