EGYPT INSIGHT: Pound Volatility Coming, Dollar Ties to Loosen

CAIRO (Capital Markets in Africa) – More volatility in the Egyptian pound is coming, but the central bank could use foreign exchange reserves and interest rates to support the currency. That’s the message from the governor of the Central Bank of Egypt.

Here’s our initial take on what the governor told Bloomberg News:

• The Egyptian pound exhibited remarkable stability last year, hovering around 18 to the dollar, even as other emerging market currencies had a rough ride and despite outflows of around $10 billion.
• The CBE denies intervening to support the pound, pointing to its largely unchanged reserves as evidence. It attributes the currency’s stability to the improvement in the current account, especially due to tourism, remittances and exports. But net foreign assets of commercial banks declined by $10 billion dollar from April to October 2018, suggesting this could potentially have been the channel of intervention.
• The CBE’s governor expects more currency volatility as the repatriation mechanism is terminated. This mechanism provided a guarantee for portfolio investors to repatriate their funds for a fee. Investors will now have to source their foreign currency from the interbank market, [Still echo] which is more exposed to supply and demand forces.
• The CBE wants to avoid excessive volatility in the pound. A depreciation of the currency could unleash another wave of inflation, especially when coupled with the expected cuts to fuel subsidies. It would also erode the returns of portfolio investors, currently in the low double digits, making Egypt less appealing. These inflows have been crucial in stabilizing the currency and increasing the CBE’s reserves.
• Does the central bank have enough tools to defend the currency? Probably yes. Reserves at the central bank are currently at $42.6 billion. This is more than enough to cover the exiting stock of portfolio investments, estimated at around $10-13 billion. The governor also mentioned raising interest rates to support the currency. Meanwhile, the risk of capital flight is also lower: net foreign investment inflows have been positive in January for the first time since last May.

Source: Bloomberg Business News