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Business News/ News / World/  The devaluation you may have missed
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The devaluation you may have missed

Egypt cheapened the pound more than any other Middle East currency this year by abandoning its fixed peg against the dollarsignalling a shift in economic priorities

For decades, Egypt managed its currency to prevent a depreciating pound from boosting the cost of imported goods, such as bread and fuel. Photo: BloombergPremium
For decades, Egypt managed its currency to prevent a depreciating pound from boosting the cost of imported goods, such as bread and fuel. Photo: Bloomberg

Cairo/New York: As investors focus on weakening exchange rates from Russia’s ruble to the Brazilian real, Egypt has fired its own shot in the global currency war.

Egypt cheapened the pound more than any other Middle East currency this year by abandoning its fixed peg against the dollar. The devaluation shows how economic priorities have shifted. For decades, Egypt managed its currency to prevent a depreciating pound from boosting the cost of imported goods, such as bread and fuel. The currency held at 7.15 per dollar for seven months after Abdel-Fattah el-Sisi became president in June.

The bigger goal now is staying competitive on exports to the euro region, Egypt’s largest market, where the currency is tumbling. The central bank allowed the pound to slide 6.3% in three weeks through 2 February, the most among 19 currencies in the Middle East and North Africa tracked by Bloomberg. The exchange rate reached a 22-month low of 7.982 a dollar in the black market, a 4.4% discount to the official rate, according to the average of seven dealer quotes obtained by Bloomberg.

Egypt wants to reverse the pound’s appreciation against the euro and eliminate the black market for dollars, central bank Governor Hisham Ramez said in an interview on 22 January.

Illegal trading in currencies thrived from 2012 as political unrest and violence drove out foreign investors and tourists, causing a shortage of dollars. The gap between the official and unofficial rates has been cut in half from 9.4% on 13 January, based on the average of quotes from three dealers surveyed by Bloomberg.

Barclays Capital and Capital Economics Ltd. in London expected a further 8% depreciation to 8.25 a dollar by year-end, according to estimates compiled by Bloomberg. Still, the depreciation will remain “controlled and moderate" as Egypt courts foreign investors at an economic conference in March and as parliamentary elections loom between March and May, Jean-Michel Saliba, an economist at Bank of America Corp. in London, wrote in a report.

That view is reflected in trading of non-deliverable forwards, with one-month NDFs at 7.655 a dollar on Tuesday, about a 0.3% discount to the official exchange rate, down from a 9% gap on 19 January, data compiled by Bloomberg show.

Has the pound become a free-floating currency? No. It’s still subject to a managed float by the central bank, which sets its value four times a week through dollar sales to banks. The regulator also controls the range at which banks can trade dollars. This was loosened at the end of January for the first time in almost two years.

Devaluation is likely to slow the drain on foreign-exchange reserves, which shrank by about 10% in a year to $15.4 billion in January, according to Saliba.

While Egypt has $46 billion of foreign-currency debt, that’s less than 20% of total liabilities, limiting the effect of the weaker pound in increasing the overall debt burden.

Inflation has been accelerating, with consumer prices rising 9.7% a year in January, compared with 4.3% in November 2012 when economic activity was slowing following the 2011 revolution. Higher import costs have a magnified effect on prices overall because more than three-quarters of the $60 billion of foreign purchases are intermediate goods that go into the manufacturing of other products, or raw materials, petroleum products and investment goods, the central bank’s data show.

Since energy is subsidized in Egypt, falling oil prices don’t have a direct impact on domestic inflation, Saliba said.

Egypt’s EGX 30 Index is among the 10 best performing equity gauges worldwide this year, after ranking fourth in 2014.

The weakening pound is likely to benefit real-estate companies by spurring Egyptians to hedge against depreciating cash through buying property, said Simon Kitchen, a Cairo-based strategist at EFG-Hermes Holding SAE. That means a potential sales boost for Talaat Moustafa Group, Heliopolis Housing, Medinet Nasr Housing, Six of October Development & Investment Co., Palm Hills Developments SAE and Amer Group Holding, he said.

Telecom Egypt, ElSewedy Electric Co., Ezz Steel and Oriental Weavers could also win. Eastern Tobacco and Juhayna Food Industries may be among the losers depending on how quickly than can reprice their products to compensate for higher imported raw-material costs, Kitchen said. Bloomberg

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Published: 11 Feb 2015, 12:27 AM IST
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