Although Egypt allowed the pound to fall more than almost every other currency in the world during the fourth quarter, investors still wondered if the authorities would loosen their grip completely if they came under more pressure.
According to him Investment bank Nomura CapitalEgypt is the economy most exposed to a currency crisis over the next 12 months, among all emerging markets. While HSBC Holdings Plc revised its previous forecast for the pound to settle around 24 per dollar, it now tentatively envisions a move towards 26, which would mean a drop of around 5.5% from current levels.
read more: Expert: Positive economic events support the cohesion of the Egyptian pound in 2023
The reluctance of foreign investors represents another pressure factor on the pound, which prompted a sharp rise in treasury bill yields, which reached their highest levels since early 2019 in recent auctions.
For his part, Farouk Sousse, an economist at Goldman Sachs Group in London, said: “There is a lot of confusion now about whether we have a truly flexible exchange rate regime.” “It has not been tested whether the pound will be more resilient in the face of external shocks in the future, and whether it acts as an automatic stabilizing factor for external accounts,” he added.
This comes as Egypt devalued the Egyptian pound by 18% in late October and indicated that it is turning to a more flexible foreign exchange regime as the economy grapples with the repercussions of Russia’s invasion of Ukraine. The currency fell by about 20% against the dollar, to its lowest level this quarter, which is the worst performance in the world after the Ghanaian “cedi”.
But the recent bout of dollar weakness globally has helped mitigate the pound’s drop to about 2% this month. That compares to a jump in emerging market currencies of nearly 3% in November as the dollar weakened.
historical fluctuations
The historical fluctuations for a week in the pound – which measure the extent to which traded prices are far from their average – have declined to levels seen before the most recent sharp devaluation of the currency, according to Bloomberg, which was viewed by Al Arabiya.net.
In turn, Simon Williams, chief economist at HSBC Holdings Plc for central banks, said: “After the initial sharp move at the time of the conclusion of the IMF deal, the Egyptian pound did not change much against the dollar, at a time when other emerging market currencies were more volatile.”
read more: The Egyptian pound ignores negative expectations and stabilizes against the dollar
“If the status quo persists and the FX market struggles to clarify central policies, the potential for a deeper downward shift in the value of the pound will rise,” Williams added.
Meanwhile, the background remains difficult for Egypt.
increased consumption
For now, Egypt is set to allow “some rapid currency depreciation” ahead of the expected approval next month of a $3 billion loan from the International Monetary Fund, which favors a more flexible exchange rate as a condition of fiscal support, according to Columbia Investments analyst Threadneedle. Gordon Powers.
Looking to the future, Egypt faces several pressure points. By the end of December, the central bank intends to remove the requirement for importers to obtain letters of credit for the purchase of some goods from abroad. The country also needs to clear a backlog of orders – estimated at more than $5 billion – from importers and companies for access to hard currency, another step that could add pressure on the pound.
“It appears that the authorities want to manage the disbursement process, and once the backlog reaches manageable levels, we could see more flexibility,” Powers said. “But until then, I think it is too early to tell how flexible the new exchange rate regime really is.”
Concerns about inflation and social stability may put policy constraints in a country where the majority are vulnerable to price shocks. While Egypt adds tools for investors and companies to hedge foreign exchange risks, trading in the local derivatives market remains weak.
In the offshore market, derivatives traders have increased their bets that the pound will drop more than 13% in the next 12 months.