Board member at an Egyptian and an Arab bank and expert of exchange market affairs Mohamed Abdel Aal said that the Egyptian pound’s situation against the US dollar will go through three stages in 2017.
The first stage, according to Abdel Aal, is the resilience phase which will come to an end by the end of the first quarter (Q1) of the year. At that stage, the pound will try to withstand and resist a number of weaknesses, backed by the Central Bank of Egypt (CBE) and the ministerial economic group. The US dollar at that stage is expected to range at between EGP 17.5 and EGP 20.5.
He added that the second stage will extend from the second quarter (Q2) to the end of the third quarter (Q3) of the year. During that stage, Egypt will receive the remaining instalment tranches agreed upon with international institutions. Additionally, the natural gas fields will have begun real production and Egypt will have finished marketing its US dollar denominated bonds. During that period, according to Abdel Aal, the pound is expected to improve and range between EGP 15.5 and EGP 17 against the US dollar.
Abdel Aal said that the third stage, which will begin with the beginning of the fourth quarter (Q4), will see stability in the flow of money transfers of Egyptians working abroad, adequate growth in tourism revenues, relative stability in regular other resources of foreign currency, and positive signs of registering surpluses in the balance of payments. Also, the pound’s value is expected to increase in that period to EGP 14-15.5 against the dollar.
Abdel Aal said that since 3 November 2016 until now is not a short period in the life of the historic economic step Egypt took. This step included getting rid of the fixed exchange rate and adopting the floating exchange rate system, in the aftermath of which the pound’s price against the dollar decreased by about 42%.
He added that with the flotation, the unofficial exchange market disappeared to a large extent, the banking system almost restored its control over the exchange market, and only one mechanism remained to determine the exchange rate—supply and demand.
“If we want to foresee the changes and paths the Egyptian pound will go through in 2017, we have to analyse strengths and weaknesses, as well as the opportunities and threats facing the elements of supply and demand for foreign exchange. Those will negatively or positively affect the paths of the pound in the next period,” according to Abdel Aal.
He explained that one of the most prominent strengths, which will definitely lead to an increase in the supply of foreign currencies and will support the pound while consequently improve its rate in 2017, is the continuation of growth of net foreign exchange reserves at the CBE, regardless of their resources.
He added that it is not about the resources that provide for the foreign exchange reserves, but the CBE’s control over the reserves and to what extent they are enough to meet Egypt’s five-month needs of financing to importing strategic commodities and paying the interest and instalments of foreign debt.
In late December 2016, foreign exchange reserves registered approximately $24.3bn, an increase of $1.3bn from November 2016. Abdel Aal believes that this means that there is a steady increase at an adequate rate in reserves, not a decrease like before. He stated that a possibility for foreign reserves to increase to $25bn, which is the CBE’s target.
“The phenomenon of the foreign exchange reserves’ growth, in my opinion, is the most important strength that reassures international institutions lending and financing Egypt about the country’s ability to pay the instalments and interests as scheduled. It also creates trust among foreign and local investors about the ability of the exchange rate to stabilise and the possibilities of the pound’s improvement to better levels,” according to Abdel Aal.
He added that one of the strengths that can also support the pound in 2017 is the policy of relying on local production, increasing exports, and reducing imports through the measures that have been taken to restrict imports by increasing customs fees, which had led to a reduction in the Egypt’s trade balance deficit by 21.3% in the first nine months of 2016.
Also, the retreat in commodity imports in December 2016 to $3.2bn compared to approximately $5.8bn in December 2015 and the continuation of that decline will lead to the trade balance deficit turning into surplus, which will definitely be in favour of reducing demand for the US dollar.
“The increase in foreign currency resources which banks have obtained directly after the flotation of the local currency has enabled them to open and finance letters of credit of about $9bn. The continuation of this phenomenon would also strengthen the pound against the dollar,” according to Abdel Aal.
He added that the positive developments the petroleum sector has seen, the start of real production of Egyptian starting in Q2 of this year, and reaching self-sufficiency in natural gas in 2019 mean saving the costs of gas imports of about $1bn annually. Additionally, the new concessions of gold mines and increasing the production of the already existing ones will stand as a support for the pound.
Moreover, one of the important elements that will also strengthen the pound in 2017 is the increase in remittances from Egyptians abroad through Egyptian banks, which registered approximately $1.7bn in November 2016, an increase of 23.2% compared to October 2016.
“These strengths assert that the Egyptian economy will get better and that its performance indicators will improve. They also assert that the significant shortage in foreign currency will gradually disappear and that the rates of foreign investment will increase, and consequently, there will be powers supporting the Egyptian pound, which will improve its price,” according to Abdel Aal.
At the same time, Abdel Aal said that there are internal and external factors that can positively impact, indirectly, the pound’s rate, such as expectations of relative improvements in economic indicators and the improvement of Egypt’s creditworthiness, which will help in increasing foreign direct investments on one hand and supporting Egypt’s ability to market the US dollar denominated treasury bonds of $6bn that are intended to be promoted in the international market on the other.
He added that approving the investment law, completing the infrastructure of planned roads, and establishing maps for national projects will give Egypt huge investment chances. In addition, improvements in US-Russian relations may lead to an increase in growth rates of the international economy, and consequently, the size of international trade may increase, which would positively impact the Suez Canal’s revenues.
He also said that the new US administration is expected to take a positive stance which will enhance investment opportunities in Egypt, in addition to a relative limitation of US dollar demand through trade and monetary cooperation between Egypt and China.
“All these chances stand as possible success elements supporting the Egyptian economy and consequently, they would lead to the improvement of the pound’s rate,” according to Abdel Aal.
The most prominent weaknesses that could negatively affect the pound, according to Abdel Aal, is the continuation of open currency positions in companies. Resolving those positions at any rate will lead to an increase in US dollar demand according to the timeframe and plan for settlements.
Also, the presence of unpaid dues owed to foreign companies operating in Egypt, especially in the petroleum sector, will put pressure on the pound during settlement, even if that happens gradually.
“The anxiety that feeds the ‘dollarisation’ phenomenon, the attempts of some importers to store stocks of raw materials and intermediate goods, Egypt’s insufficient production in the current period, the halt of energy support from the Gulf countries, and the expectation of an increase in petroleum prices will increase the cost Egypt has to pay to fill the gap of energy supply, which would increase the demand for the dollar,” according to Abdel Aal.
He added that the increase of Egypt’s total external debt by 30% in Q1 of fiscal year 2016/2017, reaching $60bn, is a dangerous indicator with regard to the burden of providing the money needed to pay the instalments of these debts or their interests at specific dates.
“All these weaknesses may join together and burden the Egyptian pound against the US dollar, as well as lead to a decrease in its prices in the market,” according to Abdel Aal.
At the same time, Abdel Aal highlighted the presence of a number of concerns and threats that can impact Egypt’s economic situation and consequently negatively impact the future of the pound’s price against the dollar, the most important of which are internal terrorism cells and external pressures threatening the stability of security.
He added that hesitating in completely implementing the flotation and the emergence of possible coordination between banks to unify the dollar’s price at a specific level may lead to the reappearance of the unofficial market.
According to Abdel Aal, several other factors may negatively impact the pound’s rate. These include the lack of clarity in applying the investment law and its various legislations, the continuation of deficit in the state budget and the public debt, the resumption of the policy of raising the interest rate, and the inability of the exporting sector to increase the size and value of exports because of the weakness of competitiveness in terms of quality, variety, and price in spite of the pound’s flotation.