Man Who Foresaw Egypt Devaluation Sees Rates at 7-Year High

  • Beltone's Genena sees 100 basis-point raise to 10.25 percent
  • Authorities may allow pound to weaken further, Genena says

The strategist who predicted Egypt’s biggest one-time devaluation since 2003 says the pound is likely to weaken further and expects policy makers to raise interest rates to the highest level in seven years.

Hany Genena, head of equity strategy at Cairo-based Beltone Financial, expects the central bank to raise borrowing costs on Thursday by at least one percentage point after letting the currency depreciate by 13 percent to 8.85 per dollar. The pound will probably trade between 9 and 9.5 this year as the central bank closely manages its fluctuations, he said.

Egypt became the latest emerging market to act to shore up its reserves, and the central bank said on Monday it will adopt a flexible exchange rate. The move aims to attract foreign investment and ease a dollar squeeze hampering a nascent economic recovery.

The central bank kept the exchange rate unchanged in its foreign-currency sale to local lenders on Tuesday. It sold $198.3 million in an “exceptional” sale, almost five times the usual amount sold to banks three times a week. It said it will offer $1.5 billion in another “exceptional” sale on Wednesday to cover customers’ “debt resulting from import transactions.”

The pound was trading at 9.567 per dollar on the black market, weakening from about 9-9.20 reported by local media on Sunday, but stronger than the 9.684 reported in a Bloomberg survey on Thursday.

The most-populous Arab country has struggled to attract investments since the 2011 uprising that ousted Hosni Mubarak, while aid from Gulf Arab allies is drying up and the tourism industry was dealt a new blow after the downing of a Russian passenger plane last year over Sinai.

Three Days

The increase in interest rates “will not be a small one, that’s for sure,” said Genena, whose investment bank was acquired by Egyptian billionaire Naguib Sawiris last year. The magnitude will depend “on what happens in the market over the next three days,” he said.

The benchmark EGX 30 Index of stocks gained 1.9 percent at 1:15 pm in Cairo, after surging by 6.7 percent on Monday, the most since July 2013. On Monday, government 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, according to data compiled by Bloomberg. They were little changed on Tuesday.

Genena said in a report on March 9 that the currency would be devalued by 13- to 18 percent against the dollar, “on or ahead of” the bank’s Monetary Policy Committee meeting on March 17. He now expects the MPC to raise the overnight deposit rate to 10.25 percent, the highest level since February 2009.

Only one other economist agreed with him in a Bloomberg survey, which had a median estimate of 9.75 percent.

Monday’s move brought back memories 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.

IMF Talks

It also comes days after a senior government official said the country is preparing to start loan talks with the International Monetary Fund, a suggestion that central bank Governor Tarek Amer denied.

“A flexible regime will unlock inflows at a whole different level,” said Genena. They will include “debt inflows, either from private investors or from funding agencies such as the IMF, as well as equity inflows,” he said.

Simon Williams, chief economist for central and eastern Europe, the Middle East and North Africa at HSBC Holdings Plc, was more cautious.

The central bank’s move is “a welcome, but long overdue shift in policy stance,” he said “The question now is will they follow through - if the Egyptian pound needs to weaken further, will they let it? Are the authorities really ready to tolerate the rise in inflation this will inevitably bring?”

Inflation eased to 9.1 percent in February, the lowest level in six months.

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