Egypt Devaluation Rages Again as New Currency Policy Moves Ahead

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(Bloomberg) —

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The Egyptian pound fell to yet another record low, a sign that authorities are pressing ahead with a shift to more flexible currency trading.

The currency slumped as much as 14% to 32.1 per dollar before paring losses to close at 29.8 on Wednesday, capping the largest single-day drop since late October. That’s narrowed the gap against prices quoted in the black market, the so-called parallel exchange rate of about 31, according to traders.

Egypt’s latest devaluation, its third in less than a year, is heaping further stress on the economy after authorities secured a $3 billion bailout package from the International Monetary Fund. The IMF said on Tuesday that Egypt is moving toward a flexible foreign-exchange policy and any intervention by the central bank will be guided by the need to smooth out market volatility.

The IMF also warned that the durability of Egypt’s policy shift “remains to be proven and the central bank may face political and social pressure to reverse course” and said “fiscal consolidation in the context of rising living costs” could see similar pushback.

Foreign exchange remains scarce as the economy of the Middle East’s most populous country contends with soaring food and energy prices fanned by Russia’s war in Ukraine. Egypt needs to unlock more financing from abroad as it tries to clear the logjam of imports at its ports that’s adding to a backlog of unfulfilled demand for dollars.

On Wednesday, the cabinet announced that a total of $8.5 billion in goods and commodities has been released from ports since December and through the first 10 days of the year.

“The objective of the authorities should be to clear the FX overhang and ensure demand for FX is met in the official market, thereby unifying the exchange rate and eliminating the parallel market,” Farouk Soussa, an economist at Goldman Sachs Group Inc., said in a report.

Traders are hedging against the risk that the pound might depreciate further to around 33.4 per dollar in the next 12 months, according to the non-deliverable forwards market.

In local currency terms, Egyptian stocks have gone on a massive rally since the country began to move toward a more flexible exchange rate.

The benchmark EGX30 has soared over 50% in pound terms since the late October devaluation, making it the best performer globally among 92 global benchmarks tracked by Bloomberg. In dollar terms, however, the benchmark slid over 5%, one of the worst 10 indexes.

When Egypt devalued its currency twice last year, long stretches of stability in the pound followed bouts of depreciation. Concerns about inflation, which is already at a five-year high, and the impact on social stability in the country of over 100 million people may be putting constraints on policy.

The IMF said the central bank “may occasionally step in during times of excessive exchange rate volatility,” but “there will be no recourse to foreign-exchange interventions or the use of banks’ net foreign assets with the intent to stabilize or guarantee the level of the exchange rate.”

Read: Egypt Needs ‘Critical’ Gulf Deals to Cover Funding Gap, IMF Says

The IMF estimates Egypt’s external financing gap at around $17 billion throughout the 46-month program, with the deal expected to unlock about $14 billion more from international and regional partners. Gulf allies also stepped in to shore up the finances of a country that’s seen as a regional linchpin.

Investors from other Arab countries were net buyers of around 7 billion pounds ($235 million) in Egyptian Treasury bonds in the secondary market on Wednesday, according to the local stock exchange’s website.

“The Egyptian pound will remain under pressure until more dollar inflows materialize, balancing foreign exchange demand and supply,” said Carla Slim, an economist at Standard Chartered Plc. “Closing the parallel market gap will likely drive the pound to overshoot before it stabilizes.”

–With assistance from Abdel Latif Wahba, Tarek El-Tablawy and Farah Elbahrawy.

(An earlier version of this story corrected day of IMF report.)

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