Monday,16 July, 2018
Current issue | Issue 1267, (22 - 28 October 2015)
Monday,16 July, 2018
Issue 1267, (22 - 28 October 2015)

Ahram Weekly

Pound moves closer to ‘fair value’

As bad news hit the economy this week, the government has been setting out its plans to fight back, reports Sherine Abdel-Razek

Pound moves closer to ‘fair value’
Pound moves closer to ‘fair value’
Al-Ahram Weekly

The Central Bank of Egypt (CBE) let the pound slide against the dollar in its third round of devaluation this year to reach LE7.93 at the banks. The makes the overall drop in the currency’s value this year to around 11 per cent.

Outside the banking system, the pound is being traded at an average of LE8.40. Analysts say the CBE move was inevitable since it could not have defended the pound further without further depleting reserves.

This was not the only piece of bad news that hit the headlines this week: net foreign reserves declined to $16.4 billion in September, almost half their level before the 25 January Revolution.

“This leaves the foreign exchange reserves at their lowest level in six months and means that Egypt has burned through the bulk of the financial support provided by the Gulf countries at March’s Economic Development Conference to support the pound,” said Jason Tuvey, Middle East analyst at Capital Economics.

Last month’s plunge, according to the CBE governor in a televised interview, was due to one-off expenses including the Suez Canal expansion, upgrading the country’s electricity grid, and repaying debt to foreign oil companies. Analysts believe that the pound still has further to go before it reaches its fair value.

Tuvey estimates that the pound needs to fall to around LE8.25 to the dollar in the official market to restore Egypt’s external competitiveness. Crucially, however, Egypt’s high rate of inflation, compared with its trading partners, means that the pound will need to weaken further over the coming year to maintain its competitiveness.

Earlier this week the UK newspaper the Financial Times cited a recent analysis by Renaissance Capital that suggests that the pound is now one of the most overvalued emerging market currencies. It said that in real term, if inflation is taken into consideration, the value of the pound against the dollar should fall still further to LE9.18.

The decline in the value of the pound is feeding fears of a wave of inflation as the decline in the value of the local currency will likely inflate the country’s already ballooning imports bill.

Egypt’s annual urban consumer inflation increased to 9.2 per cent in September from 7.9 per cent in August on the back of a hike in food prices. This came despite the fact that international commodity prices have remained low, since Egypt’s foreign currency shortage has made imports more costly.

The bad news is not only related to currency and reserves problems, however. The most disappointing news came from the Suez Canal, where revenues declined in August compared to last year to reach $462.1 million. The drop came due to the slowdown in the global economy. The news was greeted with some surprise as the new parallel waterway, inaugurated in August, was supposed to increase the number of vessels using the canal, thus increasing revenues.

Egypt’s external debt rose from $46.067 billion to $48.062 billion at the end of fiscal year 2014-2015 compared to the year before, increasing by 4.3 per cent to its highest level in 24 years. Another negative indicator is that the overvaluation of the pound helped to push Egypt’s nonpetroleum exports down 19.3 per cent in the first nine months of 2015 compared with the same period last year.

Amid this bad news, Omar Al-Shenety, managing director of the Multiples Group, said that part of the problem lies in the government’s tendency to blow up the importance of different plans and projects and present itself as the saviour of the economy. Inevitably, this leads to unrealistic expectations and a feeling of disappointment when projections are not met, he added.

Al-Shenety explained that this had been the case with the Suez Canal and the Egypt Economic Development Conference in March. Claims that the new canal would double or triple the waterway’s revenues by 2023 and that the conference had witnessed the signing of $100 billion worth of investments were exaggerated and overly optimistic, he said.

“The gap between reality and expectations leaves bitter disappointment in its wake when reality falls short of expectations. It also takes away the credibility of the government in the eyes of the international financial institutions,” he added.

Developments on the international scene are not in the country’s favour. On Sunday Finance Minister Hani Kadri said Egypt will delay the second tranche of an international bond issue that had been expected in November.

He said the decision to delay the issue was in response to the impact of China’s economic slowdown and the resulting volatility in global markets. In its first international debt sale in five years, Egypt sold an initial tranche of ten-year bonds in June, worth $1.5 billion, from a new $10 billion programme.

The government is trying to counter the bad news by promoting a new set of policies. Looking for other means to bridge the foreign currency financial gap, Egypt is now negotiating a $3 billion loan from the World Bank. The announcement came after statements that the government would get $1.5 billion of loans from the World Bank and the African Development Bank (AFDB).

Rationalising imports in general and energy imports in particular is another technique the government intends to use. Energy imports cost between $700 million and $1 billion in hard currency every month.

Egypt has also tried to reduce government spending by slashing energy subsidies. Last week Minister of Petroleum Tarek Al-Mola told attendees at a conference that re-pricing — the term usually used for slashing subsidies — energy, whether octane petrol, diesel or gas, is inevitable as the government is still heavily subsidising energy.

Octane 92 petrol costs the government LE4 per litre, but is sold for less than LE2, he said. Earlier in the week, Prime Minister Sherif Ismail promised that the energy subsidies will be reduced by 70 per cent over the next five years. The government is also sticking by its original plan to reduce the subsidies to LE61 billion in the current fiscal year from last year’s LE70 billion, he said.

Another plan to secure financing is through land sales in new communities to Egyptians living abroad in the so-called Beit Al-Watan Programme. This will take place through a two-phase project selling 9,000 pieces of land to expatriate Egyptians in dollars. The total value of the land is $2.5 billion.

The holding of this month’s parliamentary elections, the last stop on the road map, is a move that the government hopes will show that Egypt, after years of political turbulence, is a stable country and a safe haven for investment.

In the near term, after several years of political upheaval, an outcome in which the new parliament is largely supportive of President Abdel-Fattah Al-Sisi may be perceived by investors as a positive development for the economy, according to a Capital Economics research note.

“It is likely to strengthen Al-Sisi’s mandate — the current cabinet will probably receive a vote of confidence and the economic reform programme is likely to continue apace,” it said.
However, the note added that there are concerns about apparent moves towards a more authoritarian form of policy-making, meaning that a fresh bout of social unrest could be “a key threat to the medium-term outlook.”

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