CAIRO: The Egyptian pound grows increasingly attractive as a currency for investment as it maintains a stable rate of approximately LE 5.5 to the US dollar.
In a Reuters poll, 11 economists predicted that the rate would stay at 5.51 through the end of June and increase to 5.53 in July, settling at 5.52 by the end of the year. The relative constancy of the value of the pound encourages potential investors anxious to avoid losing money on currency fluctuations in more volatile markets.
Reham ElDesoki, chief economist at investment bank Beltone Financial and one of the economists surveyed, further clarified, “When the Egyptian pound appreciates or is strong against the dollar it is profitable for investors because it is cheaper for them to buy foreign currency again when they exit the market and convert from [Egyptian] pounds to US dollars.
She pointed out that while the Central Bank of Egypt (CBE) does not actually peg the pound to the dollar, its policies pursue stability in relation to the dollar’s value but allow necessary flexibility. Whether a currency is pegged or not, maintaining a stable exchange rate requires a central bank to keep currency in reserve, allowing it to inject greater amounts of liquidity when needed, or buy cash to prevent over-supply.
As of March the CBE had $34.51 billion in foreign reserves to draw on, should it need to uphold the pound’s stability.
Fluctuations in Egyptian shares followed President Hosni Mubarak’s recent surgery in Germany. Should he suddenly leave office, analysts expect a sudden cash drain, as anxiety over Egypt’s stability in the face of an uncertain political transition would frighten off investors. “Succession risk is not exerting strong pressure but the uncertainty is a constraint on its rating, Reuters quoted analysts, explaining that Egypt is currently rated just below investment grade.
In the meantime, exchange and interest rates – the overnight deposit rate has remained at 8.25 percent and lending at 9.75 percent since February 2009 – look stable. “The interest rate differential between the USD and the EGP is not expected to contract in the near future, HC Securities and Investment stated in a research note: the US Federal Reserve benchmark overnight interest rate has remained at nearly zero since the beginning of the crisis.
Reuters quoted ElDesoki explaining the Egyptian currency’s stability, We re seeing sort of a gradual pick-up in import growth, but it s not strong yet. So there s not much pressure on foreign currency.Exports and the capital inflows related to investment or services, including tourism, Suez Canal and worker remittances, are either performing well – in terms of investment, portfolio investment at least – or are gradually recovering, she explained.
She further elucidated, “There is no strong demand for foreign currency in Egypt, mainly for business purposes to finance imports, so the ‘price’ of the foreign currency, (basically, the exchange rate), does not go up. Therefore, the pound does not weaken significantly versus the US dollar.
“The counterbalancing factor is the USD strengthening against the euro, and therefore the pound as well, so you have two forces working against each other, she added.
An additional and significant influence on global currency markets, the Chinese renminbi or yuan, may soon increase in value.
Long considered undervalued by the US, which grumbles about the cheap price of Chinese exports and labor, China’s central bank is apparently nearly set to allow the yuan greater strength and flexibility in relation to the US dollar, despite opposition from the commerce ministry.
The renminbi is currently pegged at 6.83 to the dollar. According to a paper by Harvard Kennedy School of Government professor Dani Rodrik, if the renminbi appreciated by 10 percent, Chinese growth would slow by only .086 percent, as quoted by the NY Times.
Cornell professor and former IMF China specialist Eswar Prasad told the Times that raising the value of the renminbi would benefit China’s ability to fight inflation. Warnings from various economists about China’s “red hot economy and its susceptibility to a housing bubble and subsequent financial crisis, similar to those which occurred in the US, have people calling for China to cool its economic growth by strengthening the renminbi.
The impact of Chinese currency on the rest of the world has gained weight in the wake of the financial crisis, both as Chinese growth levels drive world economic output and currency rates look increasingly away from Washington and Brussels and more towards Beijing.
ElDesoki commented on how an increase in the value of the renminbi would affect the Egyptian pound, “It would make Egyptian exports to China more competitive, but it depends on the magnitude of the strengthening of the Chinese currency versus the Egyptian pound.
