Goldman Sees Egypt Tolerance for Volatility Driving Pound Swings

CAIRO (Capital Markets in Africa) – Egypt’s abolition of a repatriation mechanism for foreign investors won’t necessarily bring about more volatility in the pound, according to Goldman Sachs Group Inc.

The majority of fund flows in the local bond market over the past two years were already taking place outside the repatriation mechanism, which guaranteed foreign-exchange availability for overseas investors, Goldman said in a report. Even then, the pound remained stable, it said.

Any fluctuation would reflect the Central Bank of Egypt’s “evolving tolerance for volatility” more than “the fundamental FX dynamics,” Goldman analysts Farouk Soussa and Davide Crosilla wrote in a Jan. 29 report. The firm is one of the banks which Egypt hired to help sell dollar bonds in the first quarter of the year.

Goldman’s view differs from Egyptian central bank Governor Tarek Amer, who said this month that the stagnant exchange rate is likely to see more movement after the repatriation system ended.

Fund Flows
The pound advanced the most in almost two years Monday as fund flows into the local Treasury bills market accelerated amid improving risk appetite across emerging markets.

Many foreign investors initially relied on the repatriation mechanism, mindful that a shortage of foreign currency in previous years had made it difficult to take profits out of the country. They must now go through the open market.

Hydrocarbon and tourism inflows will continue to support the pound, adding to the steady appreciation in the currency’s real effective exchange rate, according to Goldman. This raises concerns that the country may “begin to exhibit symptoms of ’Dutch disease’, whereby the strong pound could erode competitiveness in the non-oil tradable sector,” the analysts wrote.

Egypt’s local bond market will be supported by inflows this year, according to Goldman. It offers one of the highest Sharpe ratios — which measure returns adjusted for volatility — in emerging markets, it said. While there’s a low probability of capital flight, “material tail risks” include security, political and economic uncertainties that may lead to volatility in the coming year, the analysts wrote.

Source: Bloomberg Business News