EGYPT: Currency outlook dependent on capital inflows

CAIRO (Capital Markets in Africa) – Goldman Sachs did not expect the Central Bank of Egypt’s decision to suspend the currency repatriation mechanism to make the exchange rate more volatile, despite its recent appreciation. It noted that the pound has been stable even though the majority of portfolio flows to the local bond market over the past two years have taken place outside the repatriation mechanism. It added that the depreciation pressure from the selloff of emerging markets bonds, including Egyptian bonds, between April and November 2018, has subsided.

Goldman Sachs anticipated that positive developments in Egypt’s balance of payments would ease foreign currency liquidity constraints and support the Egyptian pound. It anticipated the trends in the oil and gas sector, as well as elevated remittance inflows and tourism receipts to help shift the current account deficit to a surplus in the fiscal year that ends in June 2020.

In addition, Goldman Sachs added that risks of capital outflows from Egypt are low, as they have already materialized in 2018, while it expected strong net capital inflows in 2019. However, it considered that its benign outlook for the Egyptian pound is contingent on continued improvements in the balance of payments, including in the current and capital accounts. It said that risks to the outlook include security risks that would derail the recovery in the tourism sector, with adverse consequences on the economy and foreign currency receipts. It noted that other risks include lower remittance inflows, the high vulnerability of economic growth to shocks and rising risks of fiscal slippage after the expiration of the IMF program.