- Pound weakens almost 13% at central bank dollar sale
- Beltone Financial sees move as step toward managed flotation
Egypt allowed the pound to weaken the most in 13 years as the North African nation became the latest emerging market to ease defense of its currency to conserve reserves and boost competitiveness.
The Central Bank of Egypt devalued the pound by almost 13 percent on Monday to 8.95 per dollar and said in a statement it would adopt a "more flexible exchange-rate" policy. The authority, which currently controls the currency at regular dollar sales, didn’t give details on what mechanism would be adopted. Egyptian stocks jumped the most since 2013 and Eurobonds rallied.
The move was an echo of January 2003, when Egypt let the pound tumble by 14 percent in a single day before allowing a further 13 percent depreciation through the end of the year. The currency will probably trade between 9 and 9.5 per dollar this year as the central bank closely manages its fluctuations, according to Hany Genena, the head of equities strategy at Cairo-based investment bank Beltone Financial.
"It’s a shift in exchange-rate regime, not just a new rate," said Genena, who has predicted for several months that policy makers were on the verge of changing the currency policy. "I doubt the Central Bank of Egypt will re-peg the pound again. The next thing to monitor is that the CBE will start creating tiny daily volatility."
The devaluation came days after a senior government official said the country is preparing to start loan talks with the International Monetary Fund as it seeks to tackle a dollar shortage that’s hampering economic growth, a suggestion that central bank Governor Tarek Amer denied.
Foreign reserves are hovering at about $16 billion, less than half the level that preceded the 2011 uprising the ousted President Hosni Mubarak. The central bank wants to bring the cushion back to $25 billion by the end of 2016.
Countries that uphold pegs have been under strain after tumbling commodity prices and slowing global growth weakened currencies from Brazil to Russia by at least 35 percent in the past two years. China’s shock devaluation of the yuan in August prompted nations including Kazakhstan, Argentina and Azerbaijan to abandon control of their exchange rates in the months that followed.
Egypt depreciated the pound three times last year by a combined 8.7 percent, although it hasn’t yet shifted exchange-rate policy. In a statement on Monday, the central bank said the steps will achieve “exchange-rate levels that reflect the strength and real value of the local currency in a short period of time."
The regulator sold $198.1 million to local lenders on Monday at 8.85 pounds per dollar compared with 7.73 pounds last week. The currency fell to 8.95 per dollar in interbank trading. Under current rules, the pound is only allowed to fluctuate within 10 piasters of the rate set at the sale.
Shortly after the central bank’s statement, the National Bank of Egypt, the country’s biggest lender, said that it will start a financial product to enable foreign investors in local government debt to hedge their currency exposure.
The devaluation is "a welcome, but long overdue shift in policy stance," said Simon Williams, chief economist for central and eastern Europe, the Middle East and North Africa at HSBC Holdings Plc, who warned inflation will "inevitably" rise.
Before Monday, the central bank eased restrictions on foreign-currency deposits and withdrawals for companies and individuals, which boosted the pound on the black market. Egypt has come under renewed pressure to devalue as foreign investment slumped and tourism, one of its major hard-currency earners, languished.
The risk is that inflation, which slowed to a six-month low of 9.1 percent in February, will start climbing again. The central bank will probably raise interest rates by 50 basis points to 9.75 percent on March 17, according to median estimate of five economists surveyed by Bloomberg.
“There’s a possibility for even a larger hike,” said Mohamed Abu Basha, a Cairo-based economist at investment bank EFG-Hermes Holding Co.
The benchmark EGX 30 Index of stocks surged 6.7 percent on Monday, the most since July 2013. Sovereign Eurobonds maturing in 2025 staged the biggest rally since they were sold in June, pushing the yield down 30 basis points to 7.65 percent.
With the devaluation issue "out of the way," Abdul Kadir Hussain, the chief executive officer of Mashreq Capital DIFC Ltd. in Dubai, said he may reconsider investing in Egypt after selling all of his dollar-bond holdings last year.
"It could potentially open up Egypt for us again,” he said.