Facing a severe shortage of dollars and dwindling (if momentarily stable) FX reserves, Egypt moved to devalue the pound by around 13% on Monday in a move the central bank says will help attain “exchange-rate levels that reflect the strength and real value of the local currency in a short period of time.”
The central bank sold $198.1 million at auction at 8.85 versus 7.73 previously. Here’s a look at the EGP versus Egypt CDS which had recently diverged quite markedly relative to recent history:
FX reserves now stand at just $16 billion after sliding sharply in the turmoil that followed the Arab Spring revolution against strongman Hosni Mubarak.
On Monday the central bank said they hope that figure will rise to $25 billion by the end of this year.
Last week, governor Tarek Amer again eased banking restrictions, doing away with withdrawal and deposit caps for importers of “basic commodities” in an effort to ease the dollar squeeze that’s holding back the economy. That move came just one day after the central bank did away with similar caps for individuals and despite the fact that just 24 hours earlier, Amer said that although “it has been decided to cancel limits for individuals, the limits in force for corporates,” would remain in place.
As Reuters noted, the restrictions were “an effort to fight a black market for dollars, [as] the central bank had capped the amount that could be deposited in banks at $50,000 a month [while] setting a $10,000 a day limit on withdrawals for individuals and a $30,000 a day limit for corporate withdrawals.”
But those caps hurt the economy, and importers and exporters were essentially unable to conduct business.
Here’s how one banker explained the situation: “If they withdraw (dollars) from the banks and sell in the black market, the price in the black market will drop, and if they did it the other way round then liquidity in banks will increase, so it’s a good decision either way.” And here’s some color from BofAML on the overall situation:
Egypt’s Net International Reserves (NIRs) have stabilized recently but are close to the levels of late 2012 (US$15bn- US$13.5bn), which the CBE judged at the time as the minimum necessary to safeguard the country’s external payment capacity.
CBE continues to resist weakening EGP given the increased focus on import restrictions (with a potential for a 10-15% cut in the import bill) and moves to curb FX export proceeds smuggling. The partial and conditional removal of FX deposit caps in the banking sector on importers and exporters effectively allows a two-tiered FX market, one at the official rate and another at the now “tolerated” black market rate with CBE moral suasion attempts to cap it at 9.25. Still, CBE is likely to have to hike its policy rates going forward to keep EGP deposits attractive to depositors after the recent relaxation of deposit and withdrawal constraints on FX deposits for households and importers of essential goods, in our view.
The only question is whether, given inflation, the central bank will be willing to let the EGP adjust further. “The question now is will they follow through – if the Egyptian pound needs to weaken further, will they let it?” Simon Williams, chief economist for central and eastern Europe, the Middle East and North Africa at HSBC asked. “Are the authorities really ready to tolerate the rise in inflation this will inevitably bring?” As you can see, inflation has come down from recent highs but is still higher than authorities would like and certainly higher than Egyptians would like:
The central bank, Bloomberg wrote last week, “has resisted calls from local investors to devalue the currency out of concern that would stoke inflation in a country where half of the population lives near or below the United Nations poverty line.”
“The pound has bit further to fall; level closer to 9.5/$ would help to restore external competitiveness,” Capital Economics – where analysts say the central bank is likely to hike rates by 100bps this week – said today, in a note.
Meanwhile, there are rumors that Egypt will soon request an IMF loan, although the central bank has denied the claims.
Watch closely for whether the move has the intended effect on Egypt’s economy going forward because the country desperately needs stability following years of social unrest and a looming ISIS presence in Sinai.
Meanwhile, Egyptian stocks are of course ripping and have entered a bull market.
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