“Egypt’s Currency Dilemma: Depreciation vs Gulf Investment”

Investing.com – What comes first, another depreciation of the pound or a wave of Gulf investment? Cash-strapped Egypt has recently been racing to resolve this dilemma and secure much-needed financing ahead of a major International Monetary Fund review, Bloomberg reported.

The Egyptian government is doing its best to sell off state assets that range from banks to power plants to raise nearly $2 billion by the end of June. And allies like the Gulf states, who have pledged billions of dollars to help Egypt weather its economic crisis, are potential buyers.

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However, these investors want to see the Egyptian pound, which has already lost about half its value in the past year, weaken further before they put more money in. Meanwhile, Egypt needs the foreign exchange from those same deals before it allows the currency to depreciate, which could accelerate inflation already over 30%, according to Bloomberg.

Enacting a truly flexible currency system and reducing the country’s economic footprint are key stipulations in the $3 billion IMF programme.

Economists see setting an exchange rate for each deal as one way for Egypt and its Gulf allies to bridge these discrepancies, allowing Cairo to meet IMF review requirements by the end of next month and obtain a second tranche of its loan.

The markets are now baffled between expectations of moving to record levels and expectations of a halt in the rise in a changing macroeconomic environment.

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The Egyptian government is paving the way for investors

The Egyptian government has devalued the Egyptian pound three times since early 2022, but investors believe it should depreciate further. While it trades at 30.9 pounds to the dollar, Societe Generale expects it to drop 16% to 37% by the end of this year, i.e. close to its current level on the black market.

Authorities recently approved regulations aimed at cutting red tape and speeding up permits and land allocations to clear the way for investors.

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But expectations of a depreciation of the pound in the coming months give potential buyers little incentive to act now while they can wait for a better price for assets denominated in the local currency.

One solution might be for the authorities to give a discount on the valuation of the country’s assets to compensate for the relative strength of the pound, according to Monica Malik, chief economist at Abu Dhabi Commercial Bank.

Setting a separate exchange rate for deals is another solution, Monica said, although “broader investments will still need further depreciation of the pound”.

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Losing more pounds is not easy

Last year’s decline helped push up food prices, and it comes as the authorities are also keen to gather adequate hard currency liquidity ahead of any further currency depreciation so it can meet market demand for and avoid exchange rate escalation, according to Bloomberg.

Sources told the agency that this liquidity is also necessary to clear the backlog of foreign exchange orders from importers and other companies, which will relieve pressure on the pound and ensure a successful exchange rate adjustment.

Even if the sale of the assets offered takes place, it may not be large enough to raise the liquidity needed to pay for an orderly transition in the exchange rate, according to Mohamed Abu Basha, head of macroeconomic research at EFG Hermes.

BNP Paribas (EPA:), which said this month that any further devaluation of the pound could be much larger than previously imagined, added that it did not rule out the possibility of another Gulf deposit being pumped into the central bank “to help manage any future currency adjustment.” “.