Egypt Pound’s Gradual Drop Subdues Devaluation Bets: Arab Credit

Egyptian Prime Minister Hisham Qandil
Hisham Qandil, Egypt's prime minister. Source AFP/Getty Images

Egypt’s move to allow the pound to weaken gradually in the last three months has helped relieve investor concern that the currency’s decline will be disorderly.

One-year non-deliverable currency forwards strengthened to as high as 6.9 pounds a dollar today, reflecting bets the pound will weaken 12 percent in the period, prices compiled by Bloomberg show. The currency, which is subject to a managed float, lost 1 percent in the three months to Aug. 31 to 6.1028 a dollar, as the nation elected its first president since Hosni Mubarak’s regime was toppled last year. One-year forwards fell to a record 7.95 a dollar in June.

“When the currency is allowed to depreciate gradually, it reflects increased confidence on the part of the central bank to allow market forces to control its value as fundamentals improve,” Nour Mohei-El-Din, assistant general manager for treasury at BNP Paribas Egypt, said by phone yesterday. “That, in turn, boosts investor sentiment and drives demand for pound-denominated assets like NDFs and treasury bills.”

The yield on local-currency bills plunged to 10-month lows at the most-recent sales as Egypt secured pledges for $4 billion in financial support from Qatar and Turkey in the past six weeks. The pound is down 4.5 percent since the start of last year’s revolt, compared with drops of 9.1 percent in Tunisia’s dinar and more than 15 percent for India’s rupee and South Africa’s rand.

Confidence Back

Investor confidence in Egypt rebounded after the nation’s new government restarted negotiations with the International Monetary Fund last month for a loan of as much as $4.8 billion. The talks are due to resume later this month, with an agreement expected by the end of November, Prime Minister Hisham Qandil said on Sept. 9.

The cost of insuring the nation’s debt against default for five years plunged 320 basis points, or 3.20 percentage points, to a one-year low of 403 yesterday, since Mohamed Mursi was named president in June, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

“The change in FX policy which started in mid-2012 is positive for foreign investors,” Lutz Roehmeyer, a Berlin-based fund manager at Landesbank Berlin Investment, which oversees 10 billion euros ($13 billion) including a “minor position” in Egyptian bonds, said by e-mail yesterday. A “controlled” depreciation “gives comfort for foreign investors, meaning they stand to lose less than in uncontrolled fashion.”

Policy Change

The currency, which traded at 6.0887 a dollar today, will weaken to 6.48 a dollar by the end of September 2013, according to the median estimate of four analysts compiled by Bloomberg.

The government has no plans to devalue the currency “at the moment,” Qandil said in a conference call with investors yesterday. Last month, he declined to comment on whether the pound’s drop reflected a policy shift, reiterating the government would maintain “proper management of the pound.”

The average yield on one-year treasury bills retreated 94 basis points, or 0.94 of a percentage point, this month to 15.01 percent at last week’s auction. Once an IMF agreement is signed, T-bill yields may drop another 300 basis points in the following year, Bank of America Merrill Lynch said last week.

‘Not Enough’ Reserves

The Finance Ministry sold its first two-year floating-rate bonds on Sept. 16 at an average yield of 15.39 percent, to be adjusted every six months.

Egypt “can get away with some minor adjustments” to the pound, Jean-Michel Saliba, a London-based economist at BofA, said by phone yesterday. “The political process has bottomed out and there’s more stability.”

A draft of the country’s new constitution will be ready by the end of this month, then put to a public referendum, Qandil said in August. Parliamentary elections will be held within two months after approval of the charter, he said.

The nation’s net foreign reserves, which rose the most in three years to $15.1 billion in August due to financial support from Qatar, are only sufficient for about three months of imports, down from 8.7 months in December 2010, central bank data show.

The weakening pound is “a symptom of the fact that reserves are not enough to keep the pound at levels it was before,” Said Hirsh, an economist at Capital Economics Ltd. in London, said by phone yesterday. “The central bank doesn’t have enough power to keep it at that, so it is allowing it to gradually drop. Many investors would like to see some kind of devaluation.”

Big Investors

Egypt may miss its 135 billion-pound ($22 billion) budget deficit target for the year that ends in June, Finance Minister Momtaz El-Saieed said last month. Still, the government, which wants to double economic growth to more than 4 percent next year according to Qandil, has signed investment agreements with Qatar, BP Plc., and Samsung Electronics Co. valued at more than $28 billion.

The premium investors demand to hold Egypt’s bonds over similar-maturity U.S. Treasuries dropped 111 basis points last month, the biggest decline since January 2009, to 445, according to JPMorgan Chase & Co.’s EMBIG Egypt Sovereign Spread Index. That compares with a 10 basis-point monthly retreat for the Middle East average. Egypt’s spread was at 401 yesterday.

“Things are moving in the right direction,” BofA’s Saliba said. “Big investors are coming in, and if they were expecting a large devaluation, you would expect people to come after that, and so far they’re not. So it’s a confidence measure.”

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