Can Egypt fight off the curse of currency devaluation?
For some time now, doom-mongers have predicted a currency devaluation in Egypt. But we showcase the bullish case.
Many analysts have forecast that the Egyptian pound is set to devalue - and the only real question that remains is when. BCA Research held this view in July, predicting that there would be a 20-25% depreciation within the next three to six months. As mentioned in EuromoneyFXNews last month, Harvinder Kalirai, chief strategist at BCA was quoted as saying:
“For some time the Egyptian authorities have artificially supported the exchange rate but their ability and resources to continue to do so have diminished...
“Foreign exchange reserves have been run down by two thirds since 2011 and policymakers can no longer support the currency at current levels...
“Hence the authorities’ manoeuvring room on the exchange rate is rapidly closing.”
Hitting back, Mohamed Morsi, Egyptian president, has stressed that devaluation would be “completely out of the question”. Instead the country will rely on investment, tourism and exports to build up its economy, ravaged by civil and political conflict over the last year and a half.
Emad Mostaque, Middle East and North Africa strategist at Religare Capital Markets, highlights the reasons why the current foreign exchange regime will stay on track in a note published on Tuesday:
“Egypt is backed up by the GCC and USA, two of the largest dollar holders in the world. You only get forced devaluation if there's nobody to swap your local currency to dollars along with a few other stress factors. [It is] not the case here and we're missing most of the stressors that precede a forced devaluation like severe capital controls and a grey market...
“[Egypt] has a primary deficit of 2.5% with the remaining 7.5% being interest payments. It’s swapping out EGP debt/bills at 16-17% for USD/GCC debt at near 0%. Another example is Euro T-bills being issued at 3% versus 16-17% for EGP T-bills today. Increasing foreign debt versus local reduces government flexibility medium term, but in the current sovereign debt environment we are in that should be ok for the next 4-5 years...
“Export competitiveness isn't that high on the agenda right now, it’s not like we had a sudden spike in inflation and that scared off all those foreign investors. Foreign investors are rather looking for stability and adherence to the rule of law. The locals are looking for cheap bread, a return of the tourists in a safe environment and support for SME growth. Large industry is fine given the build up in local demand and low recent capacity utilisation during the crisis.”
And despite questions over whether Egypt would survive political transition, the country's political factions have shown themselves to be aligned when it comes economic policy:
“Outlook looks good over the next few years with both the Muslim Brotherhood and Salafist parties saying the $4.8bn IMF loan is fine, with real difficulties being 3-4 years out as growth won't quite keep up with local demand and a shift from local to foreign debt may prove an issue depending on how the eurozone pans out.”
Mostaque has this advice for investors:
“Maintain strong buy on Egypt, CIB and Telecom Egypt being our favourite stocks at 30%+ discount to fair value and likely to remain uncorrelated with global markets.”