Unfazed

CAIRO - 21 July 2018: With no significant hikes since the beginning of the year, the recent increases in the dollar exchange rate against the Egyptian pound in May and June to almost LE 18 aroused concerns that the local currency would further weaken in the coming period. After losing about 50 percent of its value after the float in November 2016, the pound had finally stabilized at around LE 17.7 per dollar from January and until the end of April.

The dollar, however, strengthened against all the global currencies, not just the pound, due to inflation, growth and employment rates in the US, in addition to the anticipated hikes in the US interest rates. Some analysts attributed the dollar hike to seasonal factors, anticipating the exchange rate to stabilize on the short-term.

By press time the dollar had stabilized at around LE 17.88; up by about 1 percent from the first four months of the year, and had increased by 4.4 percent against the British Pound and 3.9 percent against the Euro in the same period.

In May, the dollar registered its highest since January, at LE 17.96; LE 0.24 higher from April’s price. The exchange rate continued to fluctuate in June as well, before holding steady at around LE17.96 on June 26, according to Central Bank of Egypt’s (CBE) data.

Egypt’s Finance Ministry has priced the dollar at LE 17.25 in the new budget for the fiscal year 2018/19, while investment banks estimate the average dollar-to-pound exchange rate at LE 18.63, a closer rate to the International Monetary Fund’s forecast of LE 18.7.

Mubasher International’s economist Israa Ahmed predicts the rate to reach LE 18.10 per dollar. “We have floated the pound under the worst foreign currency shortage and the American currency did not exceed the LE 20 barrier at that time, so I believe that the pound will not see a sharp slip anymore, given the improvements of many hard-currency resources; especially remittances, tourism and exports as well as foreign investment,” Ahmed says.

Economic expert and former head of the Egyptian Direct Investment Association and the Arab Private Equity and Venture Capital Association Hany Tawfik says the pound will stabilize against the dollar on the short term, powered by sufficient foreign reserves and increasing tourism revenues, in addition to declining natural gas imports with the “Super giant” Zohr field going on stream.

Managing Director and Global Head of Research at EFG Hermes Ahmed Shams El-Din argues that the recent depreciation in the Egyptian pound should be read within the context of what is happening in the emerging markets in general. “The strengthening of the dollar globally on the back of the real and expected hikes in US interest rates has spurred a wave of similar rate hikes in emerging markets—like Turkey, Argentina, Pakistan and Bangladesh—to support their currencies,” Shams explains. Higher rates in emerging markets prevented the CBE from lowering rates as was expected at the beginning of the year, he continues.




Economic expert Reham ElDesoki says the recent depreciation in the pound was both expected and seasonal, as the second quarter of the year coincides with peaking demand from importers ahead of Ramadan and Eid El-Fitr, as well as from pilgrims seeking hard currency for Umrah during the holy month.

Shams adds that we also need to look at risk— mainly currency and default risks—and price (interest rates). For price, Egypt is not as attractive as before, given that other emerging markets raised rates too. But on risk, however, Egypt is definitely on a better footing.

When it comes to the outlook for the pound, Shams says, “The EGP is one of the cheapest in emerging markets, and the outlook for it is to remain relatively stable for a couple of years supported by higher-than-usual rates and strong reserves.” On the medium and long term, the real value of the pound will be determined by the performance of certain factors, including employment, production, tourism, foreign direct investments, exports, as well as slashing public debt and other economic imbalances; regardless of the volume of CBE’s foreign reserves.

Tawfik agrees, adding that, “The outlook is assuring on the short-run, and the pound will be okay as the CBE has enough reserves to defend and support its value.” He argues that the investment return on the pound is still better than other currencies, and those banking on dollarization as a hedge are gambling.

“The dollar is predicted to fall back to the level of LE 17.5-17.6 after the Eid holiday,” ElDesoki said at press time. “The local currency is also expected to stabilize and show modest improvement during the third and fourth quarters of 2018 boosted by tourism revenues and higher remittances.




ElDesoki generally expects the exchange rate to fluctuate between LE 16.5 and LE 18 to the dollar throughout the year based on the different supply and demand seasons.
A look at currencies of emerging markets.

Currencies of emerging markets have incurred great losses since the beginning of the year, hurt by political and economic factors as well as a stronger dollar, driving money flows away from emerging markets since mid-April. Since the beginning of 2018, South Africa’s Rand and the Russian Ruble slipped by around 10.6 percent and 10.7 percent, respectively.

Similarly, the Turkish Lira and the Brazilian Real dipped 24.7 percent and 13.3 percent, respectively. The Mexican Peso also dropped by 4.4 percent, and the top loser was the Argentine Peso, which plunged by almost half of its value, losing 49 percent. On the other hand, the dollar surged around 3.1 percent in this period, and analysts forecast further hikes.

Stronger dollar, soaring inflation and current account deficits in some emerging countries have resulted in outflow from equity and debt markets. Trade wars between the US and some global economies increased investors’ appetite for safe havens, rather than risk assets. Elections and political crises in Turkey and Mexico, for example, were among the key factors affecting the currencies of these emerging markets.

Authorities have taken some measures to stem these losses, yet their currencies continued the downward spiral. The central bank of Argentina raised interest rates to 40 percent, and the Turkish central bank followed suit, raising its interest rates to 17.75 percent, while the Brazilian central bank intervened by selling foreign currencies to counter the Real losses.

On June 13, the US Federal Reserve raised its benchmark overnight lending rate by 25 basis points from a range of 1.75 percent to 2 percent. The Fed retracted its pledge to maintain rates low enough to temporarily stimulate the economy. One week after the Fed’s decision, the Institute of International Finance (IIF) reported that foreign investors had pulled about $5.5 billion out of emerging market economies since the recent interest rate hike.

Outflows from emerging market equities totaled about $4.2 billion since the Fed’s policy meeting, while some $1.3 billion came out of bonds, according to data from the IIF.