HC Brokerage agrees with the Central Bank of Egypt (CBE)’s governor, Tarek Amer, that exchange rate volatility is normal, and that it should be widely accepted by all, including consumers and the investment community, chief economist at HC Brokerage, Sara Saada, told Daily News Egypt on Monday.
However, it is not very clear from the interview what extent of intervention he was hinting it, Saada said. Ideally, the CBE should not intervene to influence the exchange rate under a floating regime, she added, referring to Amer’s remarks during his televised interview on Sunday.
The CBE governor during the interview explained that during the negotiations on the loan deal with the IMF, the authorities agreed “to interfere in the market to control the exchange rate. We have massive foreign reserves that prevent extreme currency price changes.”
Saada explained that, given the status of the Egyptian economy and maturity status of the Egyptian markets, HC believes that the CBE may have a crucial role in smoothing a currency movement, in line with market forces, rather than directly intervening to influence an appreciation or a depreciation of the Egyptian pound against market forces.
Moreover, HC believes that an overvalued currency decreases the competitiveness of a country’s products and services and vice versa. Accordingly, pre-floatation, an overvalued pound decreased the competitiveness of Egyptian exports and tourism.
However, Saada said that this has completely changed post-floatation. “We believe that there is a lot of pent-up demand for Egyptian tourism that, in light of the largely improved security status and total lifting of travel and flight bans, will help unlock that potential,” she said.
“We expect tourism to provide a sustainable source of foreign currency that we believe will help in reducing the funding gap, rather than affecting the exchange rate,” she added.
Saada concluded that HC believes the November 2016 currency movement to be different than the 1990s and early 2000s movements in many ways. “In November, besides the presence of an international commitment to adopt a largely responsive exchange rate, we believe policymakers have the will and vision of adopting a more flexible exchange rate regime due to its short- and long-term benefits that guarantee the sustainability of the economy, despite its short-term inflationary effects,” she said.