Egypt Currency Slump Looms After Dollar Black Market Returns

The black market for dollars is reappearing in Cairo’s streets, the strongest signal yet that Egypt is headed toward its second currency devaluation of the year.

The strength of the dollar, persistent price differentials between local and overseas-listed shares and -- thanks to the slide in the value of the euro -- the evaporation of almost all the benefits gained from the central bank’s decision to allow the Egyptian pound to weaken 6.3 percent in January, are making further losses likely, according to foreign-exchange analysts. Now the return to business of traders offering U.S. currency for as much as 0.9 percent more than official rate is piling additional pressure on the pound.

Egypt has struggled with a foreign-currency shortage since the 2011 Arab Spring protests sent investors and tourists fleeing, fueling the rise of a parallel market where the dollar traded at a premium of as much as 9.4 percent as recently as January. Almost two years after the military-led ouster of former President Mohamed Morsi’s Islamist government, the most populous Arab nation is still dependent on aid from oil-producing Gulf allies to meet its obligations.

The street premium for dollars “certainly goes against the central bank’s assertion that the black market is dead,” Jason Tuvey, a Middle East economist for London-based Capital Economics, said by phone. “Dollar demand is relatively high. Egypt needs to let the pound depreciate sooner rather than later in order to release this pressure. It can’t rely on the Gulf forever.”

Central Bank Governor Hisham Ramez said he eliminated the black market in February after imposing a $50,000-a-month bank-deposit limit. He couldn’t be reached for comment this week.

Inflation Hurdle

Egypt’s dependence on imports, coupled with rising inflation, may discourage officials from loosening the grip on the currency, Philippe Dauba-Pantanacce, a London-based economist for Turkey, Middle East and North Africa at Standard Chartered Bank, said in an e-mail on April 20. Annual price growth accelerated to 11.5 percent last month, compared with the four-year average of 9.2 percent. The country imported $64 billion of goods in 2014, a 15 percent increase from a year earlier, central bank data show.

Egypt “has a massive import bill to manage, made up of primary products such as energy and grains,” Dauba-Pantanacce said. “These are priced in dollars, and managing the float against the dollar will most likely be the authorities’ preoccupation in the short term.”

Competitiveness Hurt

Egypt’s dilemma has been exacerbated by the decline in the euro, the currency of its biggest trading partner, at a time when the dollar has been gaining, said Jean-Michel Saliba, a London-based economist at Bank of America Merrill Lynch. About 39 percent of Egyptian exports went to the European Union last year, while travelers from the region accounted for 76 percent of tourist nights spent in the North African nation, according to central bank statistics.

The currencies of Turkey and Morocco, among Egypt’s competitors in tourism and exports, have lost 21 percent and 17 percent versus the dollar over the past 12 months, respectively. By contrast, the pound has slid 8.1 percent, making the country’s goods and services more expensive.

“Running an overvalued exchange rate has costs,” Saliba said by phone. “Given the strong-dollar environment, a stable pound is likely to cause continued erosion of competitiveness.”

With its price fixed at 7.6301 per dollar since Feb. 2, the pound has since strengthened 9.5 percent to a closing of 8.0024 per euro in March, before trading at 8.4920 against the single currency at 3:51 p.m. in Cairo, according to data compiled by Bloomberg. The euro is projected to lose almost 7 percent against the dollar by year-end, according to the average of 58 economist estimates compiled by Bloomberg, meaning more appreciation is in store for the pound if it’s not devalued.

Equity investors are already pricing in a slide in the pound. Shares of Commercial International Bank Egypt SAE, the nation’s biggest listed bank, traded in London at a 4.7 percent discount to their Cairo price today. Billionaire Nassef Sawiris’ Orascom Construction Ltd. traded 9.6 percent lower in Dubai than in Cairo.

HSBC Holdings Plc expects the pound to fall to 8 per dollar this year, while HC Securities & Investment predicts it will reach that level in the fiscal year that starts in July. Capital Economics sees a drop to 8.25 pounds per dollar by year-end.

“It’s both necessary and expected,” Tuvey said.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE