The Pound’s Recent Depreciation

The Central Bank of Egypt (CBE) allowed the EGP to depreciate 2.6%, against the USD, over the last two regular auctions. The USD cut off price at CBE’s auctions increased to EGP 7.63 on Thursday before reaching EGP 7.73 in today’s auction. It’s noteworthy that the EGP/USD remained unchanged over the past five months after it lost 6.3% of its value against the USD in Jan-Feb 2015. Here we answer the following important questions:

1)Why the CBE made such move at this particular time?

2)Is that recent devaluation enough?

3)What would be its implications, if any?

4)Do we expect further EGP depreciation?

 

1)Why the CBE made such move at this particular time?

Industrial activity and exports were adversely affected by the lack of access to foreign currencies along with the appreciation of the EGP against the EUR so far in 2015. We believe that the CBE’s governor, Hisham Ramez, was subject to immense political pressure as the government blamed his policies for the slowdown in economic growth. Hence, the discussions that preceded the ratification of the 2015/16 budget have inevitably included a push for more flexible foreign exchange management by the CBE, especially as the government is ambitiously targeting a 5% real economic growth in 2015/16. This is in addition to the expected economic slowdown of foreign currency generating activity such as tourism after the terrorist attacks in mainland Egypt and Sinai which would add more pressures to the NIR held at the CBE.

 

2)Is that recent devaluation enough?

No, it’s not. The real demand for foreign currencies in Egypt now far exceeds the economy’s capacity to generate them, especially as tourism receipts and foreign direct investments remain significantly below the pre-revolution levels. In addition, it still ran short of responding to the changes in the EUR/USD dynamics (40% of Egypt’s trade is with the EU countries); the EGP/EUR is currently 11.7% higher than its value a year ago.

 

3)What are the implications of this recent devaluation, if any?

  • It provides a partial, but still insignificant boost to Egyptian exports.
  • It increases, but still insignificantly, the prospect for higher capital inflows into the country.
  • Most importantly, it gives a signal that the CBE is starting again to take a more active, and possibly flexible, role in managing the FX market after 5 months of rigid management that left both official and unofficial FX channels dry and the EGP significantly overvalued.

 

4)Do we expect further depreciation in the value of the EGP?

Yes, we do. The inadequate performance of key foreign-currency-generating activities like tourism, along with a widening inflation gap and low NIRs level, will inevitably force the CBE to allow the EGP to further depreciate in a gradual manner. Dcode EFC projects the official interbank price of the USD to reach EGP 8.01 by end of June 2016.