According to Bloomberg article published on April 17, 2023, traders are betting that growing pressures on the Egyptian pound could soon force the central bank to allow another devaluation as the nation’s pledge to move to a flexible exchange rate comes under the scrutiny of the International Monetary Fund.
The IMF is waiting to see Egypt enact more of the wide-ranging reforms it pledged — including genuine flexibility in the currency and privatization deals for state assets— before carrying out the first review of a $3 billion rescue program. The IMF approved a 46-month program for Egypt in December, later signaling the review would likely be completed in March.
Derivatives used to hedge risks or for speculation signaled the approach of Egypt’s fourth devaluation since March 2022, belying calm in the spot market. Long stretches of stability for the currency even as its value falls on the local black market have raised questions over the authorities’ commitment to a flexible exchange rate.
The London-listed securities of Egypt’s largest listed bank are also signaling expectations of another devaluation in the North African nation’s currency. Commercial International Bank’s depository receipts on the London Stock Exchange traded at a record discount of 36% to their shares in Cairo last week. That reflects expectations that Egypt will allow its currency to weaken again, according to Hasnain Malik, a strategist at Tellimer in Dubai.
The IMF deal is a vital component of Egypt’s efforts to turn around an economy that was tipped into crisis by the shock waves of Russia’s invasion of Ukraine and is experiencing its worst foreign-currency crunch and highest inflation in years. The lender’s support is supposed to catalyze billions of dollars of investment from Gulf allies including Saudi Arabia and the United Arab Emirates that the IMF has called “critical.”
The Washington-based lender also wants to see privatization deals for state assets to ensure the review is successful, said the people, who asked not to be identified as the matter is confidential. Meantime, Egypt may need to undertake projects more slowly than originally envisaged to avoid damaging its macroeconomic stability, IMF’s Managing Director Kristalina Georgieva told reporters Thursday in Washington.
The World Bank too had words of caution for Egypt. Authorities are “moving in the right direction but they never move fast enough when it comes to reforms,” Ferid Belhaj, the World Bank’s vice president for the Middle East and North Africa, said in an interview in Washington.
Further currency declines threaten to exacerbate inflation which climbed to 32.7% in March. Egypt’s central bank chief said higher interest rates can do little to contain inflation that he described as stoked mainly by supply issues.
Chart of the Week
Lira traders are bracing for tumult ahead of next month’s elections in Türkiye — sending the cost to hedge against currency swings to the highest in the world.
The lira’s one-month implied volatility against the dollar has doubled in two days as the tenor now captures the May 14 vote.
Regardless of the outcome of the elections, Wall Street banks forecast a significant weakening in the lira, with JPMorgan analysts expecting the currency to slide to as low as 25 versus the dollar.
The Slant
As he seeks peace with Yemen’s Houthi militia, Saudi Arabia's Crown Prince Mohammed bin Salman is hoping nobody will notice that his first foray into foreign policy has been an utter failure. No matter how they spin it in Riyadh, this is a humiliation for the prince, Bobby Ghosh writes for Bloomberg Opinion.
Need to Know
Real estate rush: Morgan Stanley expects the rally in Dubai’s property prices to continue this year — even after a 20% jump since 2020 — due to cash buyers, yield-hunting investors and the reopening of China.
$80 billion stake: Saudi Arabia’s government transferred another 4% of energy giant Aramco to its sovereign wealth fund, cutting its direct ownership in the world’s largest oil company to 90.18%.
Payments opportunity: Middle Eastern credit card processor Network International received a non-binding takeover bid from CVC Capital Partners and Francisco Partners valued at about £2.1 billion ($2.6 billion).
Failed attempt: Oman’s Ahli Bank rejected an offer from the country's second-largest lender Bank Dhofar for a potential merger that would have created an entity with $19 billion in assets.
Sudan violence: Gunfire and explosions rocked Khartoum for a third day as diplomats from the United Arab Emirates, the UK, US and Saudi Arabia — a group known as the quad that tried to restore elements of civilian rule after a 2021 coup in the North African country — intensified efforts to stop clashes between the army and a paramilitary group from escalating into a full-blown civil war.
Confident of a compromise: Prime Minister Benjamin Netanyahu defended the strength of Israel’s democracy after Moody’s lowered the country’s credit outlook because of a planned judicial overhaul that has spurred mass protests.
Blow to Israeli hopes: A delegation of top officials from the militant Palestinian group Hamas, which rules the Gaza Strip, is headed to Saudi Arabia after years of frosty relations, dealing another setback to Netanyahu's attempts to normalize ties with the Gulf kingdom and isolate Hamas’s patron, Iran.
Fresh wave: A new spate of suspected poisonous-gas attacks hit Iranian girls' schools in several towns and cities last week, after authorities said they had arrested scores of people over earlier incidents.
Türkiye Elections Countdown
Rehashed promises: An election manifesto unveiled by Turkish President Recep Tayyip Erdogan’s ruling party offered little clarity on what shape policies might take after next month’s pivotal vote.
Confident of victory: Erdogan said his reelection will amount to a message to the West, which he’s said opposes him and supports his rivals.
Big rate hikes: Even before the outcome of the cliffhanger elections, Wall Street’s biggest banks are almost unanimously forecasting that interest rates would return to levels higher than after the 2018 currency crash. Citigroup now expects Türkiye’s key rate to end next quarter at 40%, while Bank of America sees the benchmark peaking at 50%.
"Excellent opportunities": Veteran emerging-markets investor Mark Mobius says stocks are the most favorable Turkish asset to invest in, whether Erdogan loses the elections or not. Meanwhile Citi economists estimate that the country could attract $45 billion to $50 billion in inflows within 12 months after the elections.
Coming Up
- Egypt trade balance: April 18
- Türkiye February home prices: April 18
- Türkiye inflation expectations for next 12 months: April 19
- Israel March consumer confidence: April 19
- Saudi stock exchange shut for Eid: April 18-24
- Dubai stock exchange shut for Eid: April 20-21
Final Word
For decades, the US-Saudi Arabia "oil for security" pact has been a pillar of the energy market. Now it's wobbling.
After the OPEC+ alliance's shock output cut on April 2, most analysts anticipate oil prices above $80 a barrel over the coming years — well above the $58-a-barrel average price between 2015 and 2021.
Saudi Arabia needs oil prices at $75-$80 a barrel to balance the budget, but that doesn't tell the whole story.
The kingdom's sovereign wealth fund aims to spend $40 billion a year on the domestic economy — including the construction of Neom, a futuristic city in the desert with an estimated price-tag of $500 billion — on top of outside investments. Those figures don't show up in the budget. To meet all these goals, the kingdom needs an oil price closer to $100.
In Russia, meanwhile, President Vladimir Putin is counting on oil revenues to fuel his war machine. Bloomberg Economics estimates that a price tag of $100 a barrel is required to balance the Kremlin's books.
Apart from boosting inflation and raising recession risks, the Saudi-Russia oil alliance also has the potential to cause trouble for US President Joe Biden's re-election campaign.
