Egypt's Devaluation Euphoria Fades Awayby
Dollar squeeze returns as gains from devaluation fade
Liberalization critical need for pound, HSBC's Williams says
One month after Egypt sought to end a dollar squeeze with the biggest currency devaluation in 13 years, the country is back to square one.
Money changers in North Africa’s biggest economy are selling hard currency at 11.47 Egyptian pounds, a record 29 percent premium to the official rate of 8.8 pounds per dollar, according to a Bloomberg survey on Wednesday of eight dealers who declined to be identified because their prices violate central bank rules. That surpassed the 24 percent gap that existed on the eve of Governor Tarek Amer’s devaluation decision on March 14, but had virtually vanished soon after.
The resurgence in unregulated trading is exerting pressure on Amer, who took the helm of the regulator in November, to follow through with a pledge of adopting a more flexible exchange rate. Four devaluations since the start of 2015 failed to quash the black market, a key supplier of foreign exchange for companies unable to meet their needs at banks. Traders of forward-rate agreements are predicting a 17 percent depreciation in the next 12 months.
“The market is looking for the value of the pound to be set by the aggregate of supply and demand, not by the central bank,” said Simon Williams, HSBC Holdings Plc’s London-based chief economist for central and eastern Europe, the Middle East and North Africa. “If that isn’t taking place, then it’s no surprise markets are disappointed.”
Traders on the black market have increased the price of dollars by 12 percent in the past week alone, according to Bloomberg’s survey, which is conducted in Cairo, Alexandria and Aswan.
The central bank has no intention to further devalue the pound, Amer was quoted by the country’s official news agency as saying on Wednesday. Currency weakness in the parallel market is due to people speculating and spreading rumors, he said, adding that they must be held accountable because they are harming the economy and national security. A day earlier, Finance Minister Amr El-Garhy said Egypt is facing a dollar shortage of "historical proportions," according to a report in Al Shorouk newspaper.
For a few days, the steepest weakening of the pound since January 2003 seemed to work. The black-market premium for dollars fell to as low as 3 percent and optimism that the devaluation would bring in foreign inflows triggered the biggest monthly rally in Egyptian stocks in four years and sent Eurobonds due in 2025 up the most since they were sold last year.
That euphoria proved to be short-lived. As the central bank shut down some exchange bureaus at the end of March for selling the U.S. currency outside an official pricing band, companies were left with little choice than to pay more to get dollars from the dealers that remained open.
Aside from the widening black-market premium, the difference in price between Egyptian stocks traded abroad and those at home also points to a pound under duress. The average difference in prices of Egypt’s three most active stocks abroad compared with their value at home indicated a pound rate of 10.83 per dollar today, the weakest since Bloomberg started tracking the data a year ago.
Still, Egyptian officials may hesitate to follow in the footsteps of other emerging markets like Azerbaijan and Argentina that abandoned fixed exchange rates in the past eight months. That’s because devaluations can be inflationary. Consumer-price growth is projected to stay at or above 10 percent for the third straight year, a trend that’s hurting the nation’s poorest people the most. Nearly half of Egypt’s 90 million people are living near or below the United Nations poverty line.
The dollar shortage that’s making life difficult for businesses that rely on imported components will probably persist until the pound reaches its fair value, said Williams. Traders of non-deliverable pound forwards are buying contracts that predict the currency will depreciate to 9.325 per dollar in the next three months, and to 10.65 in 12 months.
"It’s about turning around the cycle of expectations," said Stephen Bailey-Smith, a strategist at Global Evolution Fonds A/S in Denmark who helps manage about $2.5 billion of emerging and frontier-market debt and has traded Egyptian pound NDFs. Holders of dollars "will only give them up if they feel like there’s enough of a reward or if they expect their value to decline. Neither is the case right now."