Goldman Sachs expects continued strength and resilience Egyptian Pound Against the dollar and major currencies during the current year 2022, and the absence of significant declines for the Egyptian currency in the near term, despite the strong challenges faced by emerging economies with the repercussions of the Corona pandemic remaining.
And Goldman Sachs stated in its report on the economies of Central Europe, the Middle East and Africa that concern regarding the Egyptian currency during this year is exaggerated for five reasons, most notably that the international reserves of foreign exchange at the Central Bank of Egypt are sufficient to maintain the pound at current levels, and expectations are The outlook for the external sector improves independently of any changes in exchange rates.
She added that the benefits that may accrue to the current account from any depreciation in the currency will be limited, while the potential costs of large fluctuations in exchange rates might be huge, stressing that the depreciation of currencies is neither desirable nor inevitable in the near term, and the difference between the price of the pound Its fair value is modest.
Goldman Sachs indicated that the Egyptian economy is in great need of tourism revenues and remittance flows for Egyptians working abroad, as it depends on financing through short-term debt instruments, and this means that interest rates in the local currency will remain high, which may have an impact on investment. growth rates and public finances, and stresses the need for the authorities to intervene to achieve immediate progress and developments in structural reform, a program that is being implemented with the participation of the International Monetary Fund.
She considered that the delay in addressing structural problems would increase the pressures on the Egyptian pound in the medium and long term, although the current account dynamics appear to be good in the short term, noting at the same time that there are limits to the size of debts and the flows of investment portfolios that Egypt can To rely on it to provide the requirements of external financing, according to the Middle East News Agency.
Goldman Sachs is the world’s largest capital investment bank, working in investment banking, asset and wealth management, mergers and acquisitions, insurance and brokerage for companies and governments, making it the largest multinational financial services institution operating in more than 40 countries employees, managing assets with more than trillion dollars
Regarding the fair value of the Egyptian pound, Goldman Sachs said that according to the GSDEER model, which reviews the long-term fair values of currencies using differences in consumer prices, trade conditions and productivity as inputs, the difference between the current pound price and its fair value is considered modest, especially if we compare it with historical events that preceded the liberalization of the Egyptian pound. The exchange rate in 2016, in which the Egyptian pound was trading at 40% above its fair value.
She stated that expectations for inflation differences, which are a major driver of exchange rates, are likely to remain low, and that the consumer price index in Egypt will remain in the range of 5 and 6% in 2022, with the difference with the global consumer price index stable at regarding 2% and 3%, which is what Below the historical average, as well as continued caution regarding the strength of the US dollar, which is trading more than 10% more than its value, and the removal of the support received by the dollar may lead to downside pressure in the near term for the US currency.
Goldman Sachs stressed that the ability of the Egyptian authorities to maintain the local currency at the current levels is the greatest indication of the ability of the foreign currency reserves available in Egypt to deal with the lack of external financing for the current account deficit, but rather absorb more temporary shortfalls in financing in the near term. Despite the pressures faced by the foreign assets of the Egyptian banking sector in the past year.
The institution said that the (total) reserves of the Central Bank of Egypt, in particular, remain strong and stable, as they are currently estimated at nearly $60 billion, including primary reserves, which are estimated at regarding $41 billion, in addition to the foreign currency assets of the Central Bank of Egypt that are not included in figures The official reserve, noting that this level of international reserves is good once morest the total external financing requirements of regarding $31 billion for the current fiscal year, and more than double the stock of portfolio investments in the local market, which provides a strong support once morest any outflows.
Goldman Sachs noted that the nature of the obligations of the Central Bank of Egypt is one of the important factors that must be taken into account, as the deposits of the Gulf Cooperation Council countries represent the vast majority of them, which are likely to be renewed as long as there is a need to do so, while the obligations of the International Monetary Fund constitute a large part. of the remaining obligations, which gives a stable and long-term nature and makes these obligations do not constitute current pressures.
Goldman Sachs confirmed the ability of the Egyptian banking system to absorb domestic debt in the event of selling waves by foreign portfolio investors, and it has been proven that this capacity was abundant in previous waves of sales by foreign investors, where estimates reach that local banks currently have the ability to incur regarding $40 billion in additional government debt.
She pointed out that one of the important factors in predicting the absence of a near-term decline of the Egyptian pound is the expectations of a decline in pressures on foreign exchange, as a result of the recovery of the tourism sector, whose revenues may reach 10 billion dollars in the fiscal year 2021/2022, i.e. regarding Double what it was last year, and this would lead to a significant reduction in the current account deficit, to reach regarding 3% of GDP for the 2021/2022 fiscal year, instead of 4.6% of GDP in the 2020/2021 fiscal year.
She also indicated that the rise in oil and gas prices may positively affect foreign cash flows, as Egypt exports liquefied natural gas, and it has a positive oil surplus that is also exported, and it is likely that the rise in oil and gas prices will provide some support to reduce the trade balance deficit in Next year, as well as the expected rise in Suez Canal revenues and the increase in internal investment by the Gulf Cooperation Council countries, and the increase in remittances of Egyptian workers residing in the Gulf Cooperation Council countries.
Goldman Sachs believes that if the Egyptian authorities allow the local currency to depreciate, this will affect domestic inflation at a rate that may reach 4 percentage points, in addition to the return of dollarization risks, noting that the strength of the pound is an important sign of the economy’s strength and success.
She pointed out that the Egyptian authorities must continue to accelerate structural reforms, improve the investment environment, work to increase innovation and productivity, help the export sector attract investments in the long term, eliminate non-tariff trade obstacles and raise the efficiency of the local manufacturing sector and export infrastructure to reduce dependence on imports.
Goldman Sachs indicated that Egypt has a golden opportunity in light of the potential regional restructuring of global supply chains, following the Corona epidemic, which must be seized by strengthening the local investment environment, which will lead to more inward foreign direct investment flows, improve the financing mix and reduce the dependence of Egypt on short-term debts, in order to avoid any structural problems that would increase pressure on the local currency in the medium and long term.
