Although Egypt allowed the pound to fall more than almost any other currency in the world during the fourth quarter, investors still wondered whether the authorities would loosen their grip completely if they came under more pressure.
In his opinion Investment bank Nomura CapitalEgypt is the economy most exposed to a currency crisis in the next 12 months, among all emerging markets. While HSBC Holdings Plc revised its earlier forecast for the pound to come in at around 24 to the dollar, it now tentatively forecasts a move towards 26, which would mean a decline of around 5.5% from current levels.
Read more: Expert: Positive economic events support Egyptian pound cohesion in 2023
The reluctance of foreign investors is another factor putting pressure on the pound, which has caused a sharp increase in treasury bond yields, which have reached their highest levels since the beginning of 2019 in recent auctions.
For his part, Farouk Sousse, an economist at Goldman Sachs Group in London, said: “There is a lot of confusion now about whether we have a really flexible exchange rate regime.” “It has not been tested whether the pound will be more resilient to external shocks in the future and whether it will act as an automatic stabilizing factor for external accounts,” he added.
This comes as Egypt devalued the Egyptian pound by 18% in late October and indicated it was turning to a more flexible exchange rate regime as the economy grapples with the fallout from Russia’s invasion of Ukraine. The currency fell about 20% against the dollar, to its lowest level this quarter, which is the worst performer in the world after the Ghanaian “cedi”.
But the recent bout of dollar weakness globally has helped cushion the pound’s decline to around 2% this month. That compares to a nearly 3% jump in emerging market currencies in November as the dollar weakened.
historical swings
The pound’s historic one-week fluctuations – which measure how far prices traded are off their average – have dipped to levels seen before the currency’s last sharp devaluation, according to Bloomberg, which was seen by Al Arabiya. net.
In turn, Simon Williams, HSBC Holdings Plc’s chief central bank economist, said: a time when other emerging market currencies were more volatile.”
Read more: The Egyptian pound ignores negative expectations and stabilizes against the dollar
“If the status quo persists and the FX market struggles to clarify core policies, the potential for a deeper downward shift in the value of the pound will increase,” Williams added.
Meanwhile, the environment remains challenging for Egypt.
increase in consumption
For now, Egypt is ready to allow “rapid depreciation” ahead of next month’s approval of a $3 billion loan from the International Monetary Fund, which favors a more flexible exchange rate as a condition for tax support, according to Columbia Investments Threadneedle analyst Gordon Powers.
Looking ahead, Egypt faces several pressure points. By the end of December, the central bank intends to remove the requirement for importers to obtain letters of credit for the purchase of certain goods from abroad. The country also needs to clear a backlog of orders – estimated at more than $5 billion – from importers and companies to access the hard currency, another step that could add pressure on the pound.
“It appears authorities want to manage the disbursement process, and once the backlog reaches manageable levels, we could see more flexibility,” Powers said. “But until then, I think it’s too early to tell how flexible the new exchange rate regime really is.”
Concerns about inflation and social stability can place political constraints in a country where the majority is vulnerable to price shocks. As Egypt adds tools for investors and companies to hedge currency risks, trading in the local derivatives market remains weak.
In the offshore market, derivatives traders have increased their bets that the pound will fall more than 13% over the next 12 months.
