The Egyptian pound and a new low is expected, and what is the next stop?
In anticipation of a new cut.. What is the next stop for the pound after it equaled 3.2 cents?
The pound is threatened with a new devaluation against the dollar, reaching at least 3.5%
The increasing demand for the dollar and the slowdown in foreign inflows are putting pressure on the Egyptian pound, which may push it to a new decline of about 3.5% at least during the next few times, according to analysts and bankers who spoke to CNBC Arabia.
Egypt has been witnessing a crisis in foreign exchange scarcity for more than a year due to the repercussions of the Russian-Ukrainian war, as a result of which most of the hot money left the country, estimated at about $23 billion, which prompted it to borrow $3 billion from the International Monetary Fund, provided it had a flexible exchange rate and implementation. A set of policies to bridge part of the $17 billion financing gap.
Indeed, the local currency witnessed the largest series of declines in its history, which came three times within 12 months, until the pound equaled 3.2 cents, which exacerbated the cost of living and intensified the inflation hikes, which touched their highest levels ever.
In conjunction with the flexibility of the exchange rate, Egypt also pledged to sell some assets through a government offering program, the largest in the country's history, that included more than 32 companies, with expected returns of $2.5 billion in 2023, but it did not witness a single sale transaction for several reasons. Foremost among them are investors' fears of exchange rate fluctuations.
auxiliary factors
Several factors indicate that the pound will soon be reduced again, especially with the widening difference between the official and parallel market price to 6 pounds, before it calmed down to 4 pounds at the end of last week, due to the Christmas and Eid holidays, so that the pound traded at 35 pounds per dollar.
In addition, the difference in trading international deposit certificates of the Commercial International Bank on the London Stock Exchange at 1.22 dollars, and the share price on the Egyptian Stock Exchange at 58.5 pounds indicates the possibility of devaluing the Egyptian currency, with the arrival of the dollar in futures contracts at 44.4 pounds, while It is trading in the official market at 30.9 pounds.
currency demand
At the same time, some banks are facing difficulty in providing dollars to cover the needs of importers, and they attach importance to food commodities and production inputs to the exclusion of other sectors.
Banks provide dollars for food products and intermediate commodities, after adding a 9% margin to provide currency, and another 5% as a hedge for the depreciation of the pound, according to the former head of the Importers Division, Ahmed Shiha.
The shortage of foreign currency contributed to the increase in speculation on the dollar and was reflected in the rise in the prices of gold and cars, and with the continuation of the crisis, accordingly, increases will follow the rest of the prices of commodities, which threatens to besiege inflationary pressures in the pockets of citizens, according to what Shiha added.
Interest rates in Egypt have increased by 1,000 basis points since 2022 to support the pound, which fell 3 times during this period, as well as in an attempt to tame the high inflation rates, which recorded 32.7% at the end of last March.
peak of inflation
Amr El Alfy, head of the research department at Prime Securities, says: “Inflation rates in Egypt may reach their peak in the second quarter of the year, specifically in April, due to the potential decline of the Egyptian pound and the rise in global energy costs after OPEC’s decision to cut production, which will lead to a decline in energy costs.” It enhances the survival of inflation levels above 30% during April, to begin to decline in the second half of the year, to range between 29% and 30%.
The International Monetary Fund describes the step of establishing a flexible exchange rate regime, which would avoid the accumulation of chronic imbalances in the supply and demand of foreign currencies in Egypt and preserve the foreign exchange reserves of the Central Bank.
“The successive declines of the pound did not contribute to resolving the crisis and increasing foreign supply. The problem lies in the provision of dollars, and this must be accelerated in the offering program in any way to provide dollar liquidity that guarantees coverage of demand for the short term at least,” said a senior official in one of The largest bank operating in Egypt, he asked not to be named.
He added that the issue of devaluing the pound for the fourth time has become inevitable, but it will be gradual, which lies in the pound losing minor piasters day after day until it reaches a stage of stability.
It is necessary to adopt a policy that enhances the culture of moving the local currency among the public and citizens, and adopt solutions that support the relative stability of the exchange rate by raising the interest rate from the limit currently witnessed in the market, and opening more doors to facilitate the deposit of dollar currency in banks, according to the lecturer at the American University Hani fairy.
The pound may drop to the level of 31.5 per dollar and may touch the levels of 32 pounds in the near future, but reaching these levels will not happen all at once, but rather in a gradual manner, according to the fixed income analyst.
The delay in selling government companies, or even with regard to the movement of the pound, will definitely pressure the movement of foreign supply, and therefore it is necessary to accelerate the activation of the offering program and work to qualify the companies for sale quickly.
bond investors pressure
In a parallel trend, the Egyptian bond market has recently witnessed investors demanding high returns on Egyptian bids, which prompted the government to cancel them due to the required high interest.
At the beginning of this month, the government offered 3-year fixed-return treasury bonds in Egyptian pounds, at a value of 3 billion pounds. However, despite the tender coverage at a rate of 1.9 times, the bid acceptance rate did not exceed 0.04% of the total required.
Investors are trying to reduce the risks of negative interest resulting from high inflation and fluctuations in the local currency, so the offers in most bids are of interest much higher than the limits set, al-Najjar said.
It is expected that the pound will begin to decline gradually during the coming period, to reach the level of 32.5 pounds per dollar in the middle of the year, until it returns to levels of 31.5 pounds in the last quarter of the year, according to Prime Research.
Speculation also indicates that the devaluation of the pound will be followed by a series of measures, on top of which is the sale of a government asset to strategic investors, as an attempt to provide dollar liquidity in the short term.