Egypt Devalues Pound Third Time in 2015 After Reserves Slide

  • Depreciation comes amid government talks for World Bank Loans
  • HSBC forecasts 12 percent pound decline by second quarter

Egypt depreciated the pound for the third time this year after the nation’s foreign reserves tumbled and the currency fell to a record in black-market trading.

The pound weakened 1.3 percent to 7.9301 per dollar after the country’s central bank devalued it by the same margin at a regular dollar sale to local lenders, according to prices compiled by Bloomberg. That takes the currency’s decline for the year to 9.8 percent, making it the worst performer in the Middle East behind Algeria’s Dinar. Twelve-month non-deliverable forwards for the pound slumped 3.4 percent, the most on a closing basis in almost two months, to 10.2758 per dollar as of 3:35 p.m. in Cairo. Stocks fell the most this month.

The spread between the pound's spot and 12-month forward prices has been widening.
The spread between the pound's spot and 12-month forward prices has been widening.

Egypt came under increased pressure to cheapen the pound after China’s surprise yuan devaluation in August fueled declines across emerging-market currencies as they sought to preserve competitiveness of their exports. Foreign reserves of the most populous Arab state fell the most in almost four years in September, the same month the country announced its current account deficit had ballooned to $12.2 billion, the biggest gap in central bank data going back to 2000.

"The adjustment is welcome but only if it’s the start of a sustained depreciation trend," said London-based Simon Williams, HSBC Holdings Plc’s chief economist for central and eastern Europe, the Middle East and North Africa. "The pound needs to be significantly weaker if Egypt’s external account position is going to recover and dollar inflows are going to rise."

HSBC forecasts the pound will reach 9 per dollar by the end of the second quarter of 2016. Meanwhile, Barclays Bank Plc and Standard Chartered project 8.5 and 8.1 pounds per dollar, respectively, by then. All estimates were published before today’s depreciation.

Black Market

The move comes a day after Finance Minister Hany Kadry announced the government is in talks with the World Bank for $3 billion of loans to support the budget and ease the dollar shortage. Black market currency dealers in Cairo and Alexandria on average were charging 8.204 pounds per dollar today, according to a Bloomberg survey. That reflects the weakest pound since the poll was started in April 2013.

Government spending helped boost economic growth to 4.1 percent in the fiscal year that ended in June -- the fastest expansion since 2010. Still, non-oil private business activity contracted in six of the first nine months of 2015, according to the Emirates NBD Purchasing Managers’ Index.

Devaluation “was becoming more expected given the toll that maintaining an overvalued currency was taking on the economy," said Jason Tuvey, London-based Middle East economist at Capital Economics. “A move closer to the black market rate would, in our view, start to restore Egypt’s external competitiveness. But it’s difficult to see for how long and how far the central bank will allow the pound to fall."

Economic Reforms

Egypt can’t allow a sudden depreciation of the pound to its fair value because that would have a negative impact on almost 90 percent of Egyptians, Central Bank Governor Hesham Ramez said in an interview published in Al Shorouk newspaper today. Almost half of the population lives below or near the poverty line, according to a World Food Program study.

Ramez added that Egypt’s government prefers to complete its economic reform program before seeking a loan agreement from the International Monetary Fund. Foreign reserves fell almost 10 percent, the most since January 2012, in September to $16.3 billion. That covers less than three months of imports, compared with almost nine months before the 2011 uprising that drove President Hosni Mubarak from office.

The benchmark EGX 30 Index of stocks retreated 1 percent, the most since Sept. 29, with all but four of its members declining. The pound’s implied exchange rate, calculated using the differences of home and abroad shares of Egypt’s three most traded companies, fell 0.2 percent to 8.6624 per dollar, according to data compiled by Bloomberg.

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