The Egyptian pound has started a new confrontation with the US dollar since Monday, as the Egyptian banking market witnessed a new wave of appreciation against the dollar.
The price of the pound against the US currency increased by about 21 piasters during Monday, Tuesday, Wednesday, and Thursday to settle at EGP 17.8184 for buying and EGP 17.9412 for selling, compared to EGP 18.0276 for buying and EGP 18.1518 for selling on Sunday.
The pound had fallen sharply after the flotation of the pound on 3 November 2016, reaching as high as EGP 19 to the dollar. Yet, the local currency began recovering in late January 2017 to reach about EGP 15.73, before falling again to EGP 18.05-18.15 in March 2017. The exchange rate had settled at this rate until last Sunday.
Rumors of artificial appreciation
The banking market has been rife with rumors of a sudden surge in the price of the pound against the dollar since Monday. Bankers told Reuters that the rise of the pound after months of relative stability against the dollar appears to be “artificial” to ease citizens’ discontent after fuel prices were raised by about 100% two weeks ago.
The rumors were denied by a number of bank leaders and analysts, who told Daily News Egypt that the appreciation of the pound is natural. They attributed the move to the increase in foreign exchange offered in banks. “There are no administrative directives to raise the pound rate against the dollar,” they stressed.
Chairperson of Banque Misr Mohamed El-Etreby said that the presence of a large supply of dollars in the banks led to the occurrence of this large decline in the price of the dollar against the pound.
The branches of Banque Misr and its Misr Exchange Company witnessed last week a great deal of interest from those holding dollars to sell in favor of the Egyptian pound.
“There is a big difference between the interest rate on the EGP-denominated savings and that on the dollar,” El-Etreby explained. “Some dollar holders have transferred their savings into pounds, which has led to an increase in the supply of the dollar.”
He predicted the dollar to continue its depreciation wave in the coming period amid increasing supply.
Vice-chairperson of the National Bank of Egypt (NBE) Yehia Aboul Fotouh said that the decline in the dollar value against the pound is due to the increased supply of it in banks in the recent period. He added that all indicators point to the possibility of a further decline in the dollar against the pound during the coming period.
He pointed out that some $54bn has entered the market since the flotation, according to the Central Bank of Egypt’s (CBE) figures, which led to a large abundance of the dollar. In contrast, recent months have seen a decline in the volume of imports, which reduced the demand for the dollar.
CBE Governor Tarek Amer said in May 2017 that Egypt attracted $54bn over the six months after the flotation of the pound.
Deputy Finance Minister Ahmed Kojak said that Egypt attracted foreign investments worth $9.8bn in domestic debt instruments in the fiscal year (FY) 2016/2017, up from $1.1bn in 2015/2016.
Moreover, Egyptian remittances were up by 11.1% since November 2016 until April 2017, reaching $9.3bn, up from $8.3bn a year before, according to CBE data.
Strong revaluation of the pound
According to the research department of Beltone Financial, the pound is expected to witness a strong revaluation, while maintaining good levels of foreign exchange liquidity within the banking system on the back of a number of positive developments.
Beltone expects the local currency to strengthen to EGP 16.6-17.1 against the dollar by December 2017, recording EGP 16.8 to the dollar in FY 2017/2018.
It explained that the exceptional returns coupled with the depreciation of the currency supported stable investment flows, with a total cash flow of $54bn since the decision to liberalise the exchange rate on 3 November 2016, which supported net foreign assets in the Egyptian banking sector to record a surplus of $3.8bn in May 2017, compared with the highest deficit level of about $11bn in December 2016, and against the low deficit levels of about $0.4bn in April 2017.
Beltone also praised the CBE’s decision not to introduce current foreign exchange market flows in order to keep the exchange rate from fluctuating, leading to more inflationary pressures and challenges to the business climate.
The research centre expects the situation to take a positive turn after ensuring the ability to meet the current real demand, accumulating profit repatriation, and eliminating restrictions on capital transfers, noting that the high level of the cash reserve supports these expectations.
The monetary reserves of foreign currencies in Egypt have increased by $180m to reach $31.305bn at the end of June 2017, up from $31.125bn at the end of May of the same year.
Furthermore, Beltone also expects the pressure on the pound to gradually ease over the coming period with the stability of supply and demand variables, but pointed out that in light of the rise of foreign liabilities to $7.6bn and $12.2bn in FY 2017/2018 and FY 2018/2019 due to increased external borrowing, the pound is expected to rise slightly over the next three years.
The supply and demand mechanisms specify value
Mohamed Abdel Aal, a member of the board of directors of the Suez Canal Bank, said that the exchange rate of the Egyptian pound against all foreign currencies is determined based on the conditions of supply and demand since its flotation.
He explained that the CBE can intervene through the interbank mechanism to protect its currency, according to its interests and vision. Yet, he argued that this does not happen now, since Egypt does not have the luxury of selling dollars now for support.
Abdel Aal told Daily News Egypt in an interview that the exchange rate will go through three phases this year. The first phase, which ended with the beginning of the second quarter (Q2), is the phase in which the pound strives for resisting depreciation. During this phase, the pound should have moved in value between EGP 17.5-20.5.
The second phase, which runs from Q2 to the end of Q3, is when Egypt had received the rest of the agreed instalments from the international institutions, when natural gas fields had started actual production, and when Egypt would have completed the marketing of its US dollar denominated bonds—a prediction that has been proven correct. Abdel Aal had previously expected the pound to strengthen to EGP 15.5-17 to the dollar.
Moreover, the third phase, which is set to begin at the beginning of the last quarter of the year, will see the remittance inflows stabilise, coupled with a reasonable growth in tourism revenues, relative stability of other traditional sources of foreign exchange, and the emergence of surplus in the balance of payments. The value of the Egyptian pound, according to Abdel Aal, will hence rise to EGP 14-15.5.
“If we were to predict the changes and volatility of the exchange rate, we have to conduct an analysis of the strengths, weaknesses, opportunities, and threats facing foreign exchange demand and supply elements that will negatively or positively affect the pound’s pathways in the next phase,” Abdel Aal stressed.
He explained that one of the most prominent strengths that will inevitably lead to increased foreign exchange supply and support the pound, and hence its improved prices, is the continued growth of the CBE;s net foreign reserves, regardless of its sources.
He added that the strength of the pound will also be supported by the policy of relying on domestic production, increasing exports and reducing imports, which led to the shift of the trade deficit into a surplus. “This will certainly favour curbing the demand for the dollar,” he said.
Abdel Aal also noted that increasing banks’ foreign exchange resources, which emerged immediately after the flotation, allowed them to open and fund multi-billion dollars worth of letters of credit.
He added that the entry of Egyptian gas fields into actual production as of Q2 of this year, in order to achieving self-sufficiency of natural gas in 2019, will save around $1bn per year, noting that the new concession rights for gold mines and boosting their number will also support the exchange rate.
In addition, he explained that remittances will increase, offering further support to the value of the pound.
“The previous strengths confirm that the Egyptian economy will be better, that its macro indicators will improve, that the severe shortfall in foreign exchange sources will gradually disappear, and that foreign investment rates will rise,” he said. “Then, they will all support the Egyptian pound and will put it in a better price position.”
Domestic and external factors contribute indirectly to the pound’s improvement
At the same time, Abdel Aal highlighted other internal and external factors that could positively affect, indirectly, the improvement of the pound. These include the expectation of improving the macroeconomic indicators and improving the creditworthiness of Egypt, which will help the flow of foreign direct investment on the one hand, and marketing more bonds in the global market on the other.
However, most of the weak points that could have negatively impacted the pound, such as the open foreign currency positions of companies, have disappeared, through settling these positions. In addition, the value of the outstanding dues of foreign companies operating in Egypt has been reduced, especially in the oil sector, as well as the disappearance of psychological anxiety that fed the phenomenon of dollarisation.
Asked about the reasons for the recent rise of the pound against the dollar, Abdel Aal said that many reasons were behind this, including the continuation of the CBE in implementing a policy of deflation by raising the interest rate of the Egyptian pound by 7% three times: in November 2016, May 2017, and July 2017. “Hiking interest rate generated positive momentum for the pound,” he explained. “This also stimulated investment funds and foreign hedge funds to carry out successive and renewed transactions of futures and SWAP.”
He added that these transactions have achieved mutual benefits to their parties, where they have earned the profits of Forex and the interest rate, provided Egypt with short-term dollar liquidity, and supported the foreign exchange reserve until the gradual growth of other dollar resources.
He pointed out that the state’s announcement of a new phase of the privatisation programme by introducing some projects and institutions in the stock exchange is a positive factor for the improvement of the pound, both in terms of liquidity support and in support of the implementation of the economic reform plans, leading to the entry of new foreign investors, which will help increase the dollar’s supply.
Cancelling the cap on foreign currency expatriation
“The cancellation of the ceiling imposed on expatriation, which would not allow the transfer of more than $100,000 annually, boosted the confidence of those who had stopped bringing their savings in foreign exchange to Egypt, and it was also a reason to increase the flow of foreign exchange to banks and, thus, rise in the value of the pound,” Abdel Aal said.
He added that Egypt’s success in implementing all its commitments in the International Monetary Fund (IMF) agreement so far has conveyed a message that Egypt is capable of coping with the economic challenges and passing the economic reform plan and granting the country the right to obtain the second tranche of the loan amount agreed with the fund. He pointed out that this will improve the outlook of international credit rating institutions towards Egypt, which is one of the most important catalysts for increasing the flow of foreign direct investment.
He stressed that the serious and transparent dealing in the subsidy file will reduce the proportion of deficit in the general budget and lead to the improvement of all economic indicators, which leads to the subsequent improvement of the exchange rate of the pound against the US dollar.
“The stability of the exchange rate of the dollar during the previous three months raised the degree of confidence among holders of the dollar and ensured that there will be no unjustified increases in the future, especially with the parallel market scaling down and the availability of surplus at the banks, which enabled them to open and pay all letters of credit that were pending. This is in addition to Egypt’s obligation in repaying the instalments and interest of loans in the dates of entitlements without any delay, which has reflected positively on the pound,” Abdel Aal elaborated.
He added that the success of the fiscal policy in reducing the import bill by 50%, increasing the export revenues by 30%, and its success in marketing and covering all the issues of European dollar bonds in the European dollar market at a reasonable cost has also contributed to improving the position of the pound.
He pointed out that the continued growth of CBE’s monetary reserve, despite the various payments borne by it, would also support the pound. He pointed out that it is not wrong that some of the components of these reserves are loans or the proceeds of the sale of bonds. “What we care about most is the stability of liquidity,” he stressed.
According to Abdel Aal, the recent improvement in traditional foreign exchange resources, such as remittances and tourism had a positive impact on the pound.
He added that the economic recession in the consumer sector because of price hikes helped ease pressure on imports that have domestic alternatives, which also cut down demand on the dollar.
Finally, he explained that the improvement of Egyptian-international relations, especially with the Gulf countries, Europe, and the United States, has put Egypt in a state of moral, literary, and political stability. “Egypt can capitalise on this globally and regionally in the economic aspects, thus increasing its resources of foreign exchange and further improving the value of the pound,” he concluded.