Monday, July 27, 2015

The Outlook for EGP/USD Exchange Rate

The Egyptian economy has suffered since 25th of January revolution which resulted into the retreat of FDIs (Foreign Direct Investments) and tourism. As a result, the pound got devalued several times in the period of 2011-2013 from 5.5 EGP to around 7 pounds per dollar, even after using close to 30 BN USD of currency reserves by the Central Bank to defend the pound.  After 30th of June 2013, the situation got relieved with Egypt receiving tens of billions of dollars in the form of Gulf aid which stabilized the currency for more than 1.5 years. Yet starting 2015, the pound has witnessed two devaluation rounds to reach around 7.8 pounds per dollar in the official market and bit more in the black market, with huge concerns about the availability of the dollar in the market.
The main sources of foreign currency (mainly USD) to the Egyptian economy are facing key risks. Tourism has witnessed an improvement in the last fiscal year yet stays to be very sensitive to the security situation, which is questionable especially in Sinai. FDIs have picked up yet much slower than previously expected as a result of the regional turbulences. Suez Canal revenues are projected to increase as a result of the new lane to be launched yet such increase in revenues will probably take few years to materialize. Exports have not shown big leaps despite the devaluation of the pound where lack of competitiveness stays to be the big challenge. Gulf aid which kept the Egyptian economy afloat since 2013 has significantly retreated lately due to several political and economic issues. At the same time, the Egyptian imports didn’t retreat even with the devaluation of the pound and the different restrictions put on importing.
With these factors in mind, the pound is expected to see further devaluation by early next year, which will probably be followed by other rounds of devaluation. Few reasons confirm this.
  1. The structural deficit in the current account (difference between exports and imports), the retreat of Gulf aid and the slow pick of FDIs, which makes the Egyptian economy short of US dollars.
  2. Central Bank is determined to fight the black market which would require further devaluation rounds to bridge the gap between real value of the pound and its official rate.
  3. Foreign investors won’t invest while the pound is overvalued pushing the Central Bank to devalue the pound more.
  4. Europe is Egypt’s main trading partner and with the weakening of the Euro, the pound will need to be devalued more to avoid hurting Egyptian exports.
  5. Finally, the Central Bank has expanded in printing money to finance the budget deficit where its holdings of T-bills and bonds have doubled in this year’s budget, thus pushing inflation higher and increasing demand on the dollar as a safe heaven.
So most likely, more devaluation is yet to come before we see stability again in the Egyptian pound.

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