Morgan Stanley suggests phase devaluation as it renews economic reforms post-election

Cairo – December 13, 2023: Investment bank Morgan Stanley believes that Egypt will renew its privatization or debt reduction efforts soon, expecting that it will complete its economic reforms after the presidential elections, according to Ashraq Business.

In a research note seen by the news outlet, Morgan Stanely suggested Egypt implement a “phased devaluation of the pound in the short term, rather than a complete floatation of the exchange rate” rather than a free float.

However, if this does not develop into a permanent free or managed float, the black market and pressure on Egypt’s reserves will return, it explained.

Morgan Stanely clarified that the potential impact of economic policy on the cost of living and the fiscal deficit, as well as possible fresh financing from multilateral and regional partners, are some of the influential factors related to exchange rate policy decisions.

“A phased adjustment (of the pound exchange rate) to levels below the current parallel market rate is likely appropriate in the short term, once focus returns to the economy after the end of the presidential election,” explained the investment bank.

In the financial derivatives market, traders project the Egyptian pound will be pressured to drop a further 40% in the coming year, possibly closing at around $50 per LE.

The Egyptian pound has survived multiple devaluations since March 2022, losing around half of its value against the USD.

Further regional and multilateral financing and a potentially expanded support package from the International Monetary Fund (IMF) will support a modest recovery in foreign flows, according to the report.

With a renewal in efforts to sell state-owned assets and reduce debts, the investment bank believes that the IMF will boost its loan to Egypt from $3 billion to $5 billion.

It also projected global financial conditions to ease soon, bringing in fresh multilateral financing and encouraging the adoption of further gradual flexibility regarding the exchange rate, which would lead to attaining macroeconomic stability in Egypt.