Saturday,21 October, 2017
Current issue | Issue 1303, (14 - 20 July 2016)
Saturday,21 October, 2017
Issue 1303, (14 - 20 July 2016)

Ahram Weekly

Towards devaluation?

Egypt’s persistent foreign currency crunch may make another devaluation inevitable despite fears of further inflationary pressures, reports Sherine Abdel-Razek

Towards devaluation?
Towards devaluation?
Al-Ahram Weekly

They are going to do it again. The Egyptian pound will likely be seeing another devaluation after March’s 13 per cent devaluation, the first one-shot depreciation since 2003, failed to stabilise the foreign exchange market. 

The black market for currency is still thriving, undermining government efforts to attract the investments needed to cover local industry needs. The pound is trading at a discount of almost 20 per cent on its official rate versus the dollar on the unofficial market and the economy is slowing down. 

“I will never be unhappy when the foreign exchange rate is stable, but the country’s factories are not working,” Tarek Amer, the Central Bank of Egypt (CBE) governor, told local media last week. He added that it had been “a grave mistake” to defend the pound over the last five years. 

Hints at easing the grip on the pound are read by most economists as indicating another devaluation.

Under his leadership, the CBE is focusing on reviving the economy rather than stabilising the exchange rate. 

But business activity in Egypt shrank for the ninth straight month in June on the back of further declines in output, new orders, and employment, according to the Purchasing Managers Index (PMI) survey evaluating the performance of the non-oil private sector. 

The companies surveyed noted sharply rising raw materials costs stemming from currency weaknesses against the US dollar.

June’s survey suggests that the Egyptian economy continued to slow at the end of the 2015/16 fiscal year, with the tourism sector appearing particularly weak after the crash of Egyptair flight MS804 in May, said Jean-Paul Pigat, a senior economist at Emirates NBD which issued the survey.

“As we start the new fiscal year in July, hopes for a stronger recovery in the economy will depend in large part on whether a solution to the ongoing foreign currency liquidity crunch can be found in the near term,” Pigat added.

No one knows what the timing of any new devaluation will be, as while in March Amer hinted that he would not devalue the pound before the reserves reached $25 billion in order to have sufficient reserves to defend the currency, he also surprised the market with that month’s devaluation with reserves $8billion dollars lower than that sum.

Egypt’s reserves stood at $17.55 billion at the end of June. At the start of July, Egypt returned a $1 billion deposit to Qatar and repaid $720 million in Paris Club debts.

What has intensified the feeling that a new devaluation is in the making was the meeting that took place on Saturday between President Abdel-Fattah Al-Sisi, Prime Minister Sherif Ismail, Finance Minister Amr Al-Garhi and Amer. 

The devaluation had been expected to take place on Tuesday when the weekly auction to sell dollars to the banks is held. However, the CBE kept  the pound stable at LE8.78.

Meanwhile the value on the black market reached LE11.40 following on Monday afternoon gaining LE0.2 since Amer’s comments on the monetary policy. This pushed local gold prices to another high, with a price per gm of 24 carat gold at LE463.

The stock market reacted positively to the news, with an eight per cent increase in the two sessions following Amer’s comments on monetary policy. Considered as the best investment at times of devaluation, real estate stocks were among the biggest winners on bets of a cheaper currency. 

Observers believe that there are two scenarios that could be relevant to the devaluation: either to devalue by about 24 per cent to reach the value on the parallel market or pace the devaluation with inflation and hold the rate at LE9.95.  

As for timing, this will depend on the CBE’s ability to inject foreign currency into the market after devaluing the currency, according to Reham Al-Desouki, senior economist at the Dubai-based investment bank Arqaam Capital. “This could happen in a month or two,” she added.

Egypt is still suffering from weak foreign currency inflows. Revenue from tourism, a major source of hard currency, fell by more than 62 per cent to $550.5 million in the third quarter of last year from $1.458 billion in the same period a year earlier. The current account deficit almost doubled in the same period. 

Economists believe that the forex crunch might ease a bit during the first two quarters of the new fiscal year, starting in July with a pending Eurobond issue, rumoured talks with the IMF and the injection of pledged Saudi and Emirati aid. All this would also help give room for a devaluation. 

Al-Desouki believes that the recent repeated mentions of an imminent IMF deal were aimed to communicate to investors what has been happening informally in an attempt to boost confidence in the economy and test the waters ahead of a possible official announcement to the public. 

Last month, one minister told Reuters that Egypt was in negotiations with the IMF for a $5 billion loan deal and that an IMF delegation was expected to visit Egypt to continue negotiations.

Amer denied the reports but said that if Egypt asked for a loan, it would be eligible for amounts of “more than double those that have been stated by virtue of its shareholding in the Fund.” 

“This is the first time that the CBE governor has provided details on the issue, leaving ample room for inferences,” according to Al-Desouki.

She expects a decision could come when an IMF and World Bank delegation visits Egypt in the second half of July. If a deal is formally announced, the bulk of the funds could be received sometime in the third quarter of 2016. 

The government is also planning to issue a $3-5 billion Eurobond by October, according to Al-Garhi. The bond issue should have been made earlier, but the government opted to delay it due to turbulent financial markets and the slowdown in China, which has reduced liquidity for emerging markets. 

The previous Eurobond offer was in June of last year, the first in five years.

Egypt is still expecting $2 billion in assistance from the UAE, and $2 billion from Saudi Arabia, in addition to $1 billion from the World Bank once the new VAT law is ratified and implemented in July. It may also receive a $500 million tranche from the African Development Bank.

Fears of the effect of any new devaluation on the already high inflation might slow the decision. Plans to cut energy subsidies further through implementing the third phase out of electricity subsidies this month, in addition to the introduction of VAT this fiscal year, are also expected to exacerbate inflationary pressures. 

Data released last week showed that Egypt’s headline inflation rate, which covers urban consumers only, rose from 12.3 per cent in May to 14 per cent in June, its highest in seven years. This increase shows that March’s devaluation raised price pressures, according to Capital Economics, a consulting firm.

Food inflation, which accounts for around 40 per cent of the consumer price inflation basket, rose from 14.3 per cent to 17.6 per cent. “We estimate that this added 1.3 per cent to the headline inflation rate,” Capital Economics said.

With such inflation rates the CBE could opt to increase interest rates by a further 0.5 per cent, though this would make it costlier for businesses to obtain finance. 

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