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Daniel Richards - MENA Economist
Published Date: 04 June 2020
The Egyptian pound has depreciated in earnest in the past two weeks, slipping to EGP 16.07/USD at the time of writing on June 4, having crossed its 100-day moving average the previous day. Previous to this the currency had been on another bout of sideways trading at around EGP 15.75/USD over the nearly two months from March 22 to May 14, even as the coronavirus pandemic took hold both in Egypt and around the world. We had expected that the authorities would prioritise near-term stability and intervene to hold the currency steady for a longer period, but whether it was the rapid run-down seen in reserves, or on the back of prompting by the IMF, the pound has now begun to slip sooner than we anticipated.
Source: Bloomberg, Emirates NBD Research
Given the massive pressures relating to the coronavirus pandemic which are mounting on Egypt, this prompts the question as to whether we are likely to see a similar move lower to that seen in 2016. Then, too, a severe strain on Egypt’s balance of payments prompted the country to enter into a new reform programme with the IMF, just as it is looking to do now. However, the current pressures are not near as intense as they were then, given the positive progress made by Egypt over the course of its recent IMF programme in ironing out many of its previous external imbalances. Further, we would expect a rebound in many of Egypt’s inflows over the next 12 months, barring any disastrous escalation of the coronavirus crisis. As such, we project a much milder depreciation back to EGP 17.00/USD by year-end and to EGP 18.00/USD by end-2021. This is the level around which the currency traded through much of 2017 and 2018, before it began its appreciatory run in January last year.
We had in any case believed that the pound would reach the upper limits of its appreciation around the middle of this year at EGP 15.50/USD (see Egypt Quarterly Q1) before beginning to sell off once more, but the pressures of the pandemic, and its effect on remittances, tourism revenues, Suez Canal revenues and portfolio inflows have brought the end of appreciation sooner than expected. The hot money outflows seen as the attractiveness of local debt has diminished have been somewhat mitigated by a USD 5bn Eurobond issuance last month, and further support from the IMF in the form of a USD 2.8bn rapid financing instrument (RFI) will also have steadied the ship. Nevertheless, maintaining the pound at the EGP 15.75/USD level for much longer would have likely been a drain on reserves, which fell by a record USD 5.4bn in March and a further USD 3.1bn in April.
Reserves remain considerable at around seven months of import cover according to the Central Bank of Egypt. However, intervening to hold the currency firm at those levels for a prolonged period could well have proved counter-productive had it begun to raise questions over the pound’s true value, potentially deterring the portfolio investors upon which the CBE has come to rely. Further, the negotiations around a new standby agreement with the IMF, which will come with far more requisites than the RFI, could see some pressure exerted by the Fund for a more flexible exchange rate regime, prompting further depreciation.
Updates to our Treasury and FX views
India Monitor - February 2020