On Monday, February 10, 2020, the Egyptian pound, on the back of stable foreign currency inflow, reached its highest value since the 2016 devaluation, hitting EGP 15.67 against the US dollar as announced by the Central Bank of Egypt (CBE). Seen as an indicator of a healthy economy, the stable appreciation of the EGP in 2020 so far has been celebrated by economists and the public alike, highlighting growing confidence in Egypt’s economy and its reform program.
What’s pushing the upward trend?
Plain and simple. Since the 2016 devaluation of the EGP, the country has seen a stable inflow of foreign currency from diverse sources, according to Union De Banques Arabes Et Francaises’ (UBAF) chief regional director, Hamed Hassouna, exclusively revealing his insights to Business Forward.
“It is both the successful monetary reform program and the global economy pushing foreign portfolio investor flows to Egypt,” says Hassouna. “Tourism is performing well, as well as the oil and gas sectors and remittances from Egyptians abroad, though lower than before, but still contributing significantly to Egypt’s economy. However, the import-based sectors are suffering from import obstacles and low purchasing power within the Egyptian economy, pushing the FX rate down.”
Not to be overlooked is the inflow of foreign investment in Egypt’s sovereign debt, t-bills and t-bonds, adds Hassouna.
“Egypt’s sovereign debt was the superstar of emerging market investment in 2019; those [investors] who invested in the one-year t-bill in early 2019 earned a 20% interest. More importantly, what makes Egypt very attractive is the stable, conservative moves in interest rates by the CBE, and the slow movements in the FX market, reflecting the strength of the Egyptian banking sector and FX market.”
Does a stronger EGP mean prices will decrease?
When the EGP was devalued, prices of goods and services mounted on the back of soaring inflation. Could reversing that simply translate into cheaper goods?
“The [appreciation of the EGP] might not always be translated into a decrease of prices,” explains Hassouna. “It might be translated into a slower or no increase in prices, considering that prices of goods and services in Egypt are not a function of the FX rate alone, but also vulnerable to supply chain factors. The appreciation in the EGP has, however, affected prices in the automotive sector.”
Is approaching pre-floatation FX rates a realistic possibility?
“The free-floating market marks a change in Egypt’s FX regime, moving away from the pegged model where the CBE kept the rate at a certain level, to the situation now where the flows available in the market determine the FX rate. Therefore, USD/EGP now reflects changes in the balance of payments. Only if the Egyptian economy is turned into an export-led economy, with very low levels of debt, can the EGP see drastic appreciation, and that can only happen on the very long term, after strong structural reforms,” elucidates Hassouna.
“It is worth mentioning, however, that in 2016, the International Monetary Fund (IMF) expected that floating the EGP would push the rate to EGP 13 per USD, so this might be a number to keep in mind when analyzing monetary policy and fiscal policy decisions.”
What are the best- and worst-case scenarios for the EGP this year?
“Giving specific numbers to answer this question would only be a matter of speculation, but let me to tell you that the best-case scenario for the EGP, like any other currency, is smooth and healthy volatility, accompanied by a continuously liquid market allowing easy entry and exit from the Egyptian market. The worst-case scenario would then be extreme and unexpected ups and downs in the FX rate,” concludes Hassouna