- Pound slipped as much as 26.5 per dollar in offshore market
- Nation’s dollar bonds rallied Wednesday with IMF in focus
According to Bloomberg article published on January 4, 2023, the Egyptian pound plunged to a record low on Wednesday as authorities navigate the country’s worst foreign-exchange crunch in half a decade.
The currency headed for its biggest slump since a devaluation in October with a slide of as much as 7% to about 26.5 per dollar in the offshore market, before trimming some losses, according to data compiled by Bloomberg. That still leaves the pound stronger than prices offered in the black market.
“This is certainly another devaluation,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank. “It stems from the wide differential from the official and parallel market rate, which has added to the tightness and shortage in FX liquidity.”
Egypt allowed its currency to weaken twice in 2022, eventually clinching a $3 billion loan from the International Monetary Fund thanks to a pledge in October to adopt a flexible exchange-rate policy. The North African nation is one of the world’s largest wheat importers and it has grappled with the economic fallout of Russia’s invasion of Ukraine that’s touched off inflation.
Egypt dollar bonds led gains among emerging-market sovereign bond peers on Wednesday after the pound weakened, cementing expectations that authorities will comply with IMF requirements. Notes due in 2061 rose as much as 2.5 cents to 65 cents, the highest since August, according to indicative pricing data collected by Bloomberg.
“Markets are likely reading this as a possible signal that, after many false starts, Egypt is finally ready to commit to a flexible exchange-rate regime,” said Patrick Curran, an senior economist at Tellimer Ltd., a firm that specializes in emerging-market research.
An overvalued currency has been an impediment to narrowing the country’s current-account deficit and attracting investment flows, he said. “Another devaluation will help reduce external imbalances and means there will be more dollars around to pay bondholders.”
Ahead of the currency move on Wednesday, Egypt’s two biggest state-run banks issued one-year certificates of deposit at an interest rate of 25%, in an apparent effort to encourage savers to let go of dollars and contain inflation by soaking up excess liquidity.
Allen Sandeep, director of research at Naeem Holding in Cairo, said the latest bout of depreciation sets the stage for a pickup in inflation to around 23%-25% and higher government borrowing costs. Sandeep said he also expects “better visibility in terms of FX liquidity going forward.”
The decline in the pound came as the Arab world’s most populous nation struggles to clear a roughly $5 billion backlog of imports that had piled up at ports because of a now-revoked letter of credit requirement. That rule had been put in place because of the foreign currency squeeze.
‘Wait and See’
“We’ll have to wait and see” the level of FX liquidity in the interbank market, said Mohamed Abu Basha, head of macroeconomic research at Egyptian investment bank EFG Hermes. “The rate at which the market clears backlogs and meets new demand after lifting the LC requirement will be key.”
Egypt’s Gulf allies have pledged more than $20 billion in deposits and investments to help a country they view as vital to regional security and stability.
The pound’s depreciation followed a massive interest-rate hike at the end of last year and what officials have said is progress in clearing the logjam of imports at its harbors.
Analysts had said that for the devaluation to bear fruit, the government would need to ensure that it had enough foreign currency liquidity to effectively meet demand and stamp out the parallel exchange market.
In the offshore market, derivatives traders have stepped up bets that the pound will additionally depreciate past 32 per dollar in the next 12 months.
The currency tumbled 15% on Oct. 27, the same day authorities said they’d adopted a flexible exchange-rate regime, helping seal the IMF agreement. It fell another 4.4% on Oct. 31.
“Despite this latest devaluation, a meaningful differential still remains with the parallel market, and it goes back to the question of GCC support,” Malik said. “We do not expect to see wider capital inflow at this point, with ongoing concerns over ability to repatriate funds and FX liquidity tightness.”
