2024-03-07 09:40:46
Egypt devalues its currency by 60% and raises interest rates by 6% to fill its dollar gap… and experts: “a real float.”
The Central Bank of Egypt took a widely expected step that allowed for a record devaluation of the pound, after it raised interest rates by 600 basis points, on Wednesday morning, in an extraordinary meeting, which observers considered a “real float.”
The Egyptian pound fell against the dollar from 30.91 pounds to the range of 50 pounds (it closed at the level of 49 pounds), a decline of about 60 percent, as of 14:57 GMT, which is a record level that it had never reached before in official transactions, while it was trading. About 45-50 in the parallel market, which was greatly affected by dollar flows from the Ras El Hekma deal.
Immediately, Egypt’s international bonds jumped by more than two years, and Tradeweb data showed that the country’s international bonds rose after the Central Bank announced its decision, and the longest-term bonds achieved the largest gains, such as the 2047 bonds, which rose 3.5 cents to 83.2 cents.
The premium demanded by investors over US Treasury bonds, which are considered a safe haven, to hold Egypt’s international bonds decreased to 534 basis points, which is its lowest level since June 2021, according to JPMorgan data.
Egypt’s debts
The cost of insuring Egypt’s sovereign debt declined sharply during the period, with 5-year contracts reaching about 5 percent, compared to 9.85 percent in Friday trading, and more than 16 percent before the announcement of the Ras El Hekma deal. This is the level that defaulting countries usually reach.
This decrease reflects the improvement in international investors’ view of the Egyptian economy, after these successive measures, which demonstrate “the Egyptian administration’s intention to complete the economic reform program.” According to Ahmed Moati, CEO of VI Markets Investment Company, who confirmed that the measures taken by the Central Bank are a “real float.”
The Ras al-Hikma deal with the UAE government brought dollar inflows of about $24 billion, in addition to transferring deposits worth $11 billion into the Egyptian pound, for use in other major projects.
The dollar gap in Egypt is estimated at about $50 billion, between debts maturing within a year and the current account deficit, while dollar flows are estimated at about $45 billion, according to research institutions.
On Wednesday afternoon, Egyptian Prime Minister Mostafa Madbouly announced that his country had reached an agreement with the International Monetary Fund, worth $8 billion, up from $3 billion.
In this regard, the International Monetary Fund confirmed that moving to a flexible exchange rate in Egypt will help it manage external shocks, and move the government towards a complete inflation targeting system over time.
In a statement issued at sunset on Wednesday, the Fund believes that “Egypt’s international and regional partners will play a fundamental role in facilitating the implementation of the policies and reforms adopted by the authorities.” This is after the Egyptian authorities demonstrated “a strong commitment to move quickly on all critical aspects of the economic reform program” supported by the Fund.
According to the statement, the two sides discussed controlling financial conditions to sustain debt sustainability.
A statement from the Fund indicated that the government agreed to continue financial control measures in the medium term, and to establish a new framework for reducing spending on infrastructure.
Addressing inflation
To address the expected inflation, the National Bank of Egypt and Banque Misr, the two largest government banks, hastened to issue new savings certificates with an annual return of 30 percent, with a period of 3 decreasing years, indicating expectations of curbing inflation after taking this step.
Egyptian television reported that the bank announced that it had adjusted the interest rate on the three-year platinum certificate with a fixed return to 21.5 percent annually for new issuances, as of Wednesday instead of 19 percent, with the return being disbursed monthly. The bank also adjusted the interest rate on platinum savings certificates with a monthly return payment period to become an annual rate of 26 percent for the first year, 22 percent for the second, and 18 percent for the third for new issues.
In addition, these steps are scheduled to be followed by an announcement from the International Monetary Fund about the success of the first and second reviews, with the value of the extended facility for Egypt being raised to about 10-12 billion dollars, which was confirmed by government media, citing a high-level source.
Egyptian television quoted the unnamed source as saying that the new financing agreement with the International Monetary Fund would strengthen the social reform program and increase the flow of foreign liquidity to the local market. Cairo News Channel also reported that the Central Bank of Egypt had directed to open the limits for credit card uses. In foreign currency.
The pound’s exchange rate has been stable at an average of 30.9 to the dollar for about a year.
Egypt suffers from a severe shortage of foreign currencies despite the devaluation of the Egyptian pound by about 50 percent since March 2022, and Cairo signing a new rescue package with the IMF worth three billion dollars in December of that year.
What comes after the “Central Bank” step?
The Central Bank of Egypt said in a statement on Wednesday morning that the local economy has recently been affected by a shortage of foreign currency resources, which has led to the emergence of a parallel market for the exchange rate and a slowdown in economic growth.
He added, “The external repercussions resulting from global inflationary pressures continued to accumulate, coinciding with the global economy being exposed to successive shocks. These shocks and their repercussions led to a rise in uncertainty and inflation expectations, which increased inflationary pressures.” The resulting exchange rate movements, in addition to the rise in global prices of basic commodities, along with domestic supply shocks, led to continued inflationary pressures.
Economic and financial analyst, Haitham El Gendy, believes that the Central Bank of Egypt’s decision is “long overdue,” because it “aims to completely eliminate the parallel market and unify the exchange rate,” after the parallel market dollar witnessed increases that reached the level of 70 pounds per dollar.
El Gendy told Asharq Al-Awsat that raising the yield by 6 percent will attract dollar flows to Egypt, especially after reaching an agreement with the International Monetary Fund, which will facilitate Cairo’s obtaining credit facilities from bilateral partners.
Although El-Gindy stressed that the return of hot dollar flows is “necessary” to compensate for the impact of the decline in the exchange rate on the fiscal deficit, he pointed out that “Egypt’s chances will be better in the second half of this year, with the start of a wave of global monetary easing…”
Al-Jundi stressed the importance of continuing “real reforms” that will revitalize the private sector and attract real foreign direct investments.
In this regard, Egyptian Prime Minister Mostafa Madbouly stressed the government’s continued rationalization of spending and support increasing the private sector’s contribution to the economy. He pointed to the continuation of coordination between the government and the Central Bank during the coming days to monitor the markets and know the impact of the decisions on them, explaining that the goal at the current stage is to work to reduce the inflation rate, control debt and move it to a downward path with the continuation of the measures of the structural reforms program that focuses on pushing sectors Industry, agriculture and communications, with continued supportive policies to increase the private sector’s contribution to the economy.
For his part, Amr Al-Samadouni, Secretary General of the International Transport and Logistics Division at the Cairo Chamber of Commerce, believes that the Central Bank’s measures will contribute to saving dollars in banks, and significantly limit people’s tendency to go to the black market to obtain them. They also “prevent the storage and trading of dollars, which is what It contributes to eliminating the black market for currencies, which merchants and importers have long suffered from.”
Ahmed Moaty, CEO of VI Markets Investment Company, said that the government’s next step after eliminating the parallel market and unifying the exchange rate is how to rationalize and quality spending, while giving positive signals to local and foreign investors, so that the business climate becomes attractive again.
Moati pointed to the return of credit cards by banks to operate without a ceiling, which gives confidence in Egyptian banks in managing the dollar, in addition to providing the dollar to importers and producers, and that the Central Bank now has good dollar revenues as a result of the “Ras El Hekma deal” flows.
He stressed the importance of reducing the dollar gap, by “reducing debt and rapidly increasing productive competitiveness during the coming period, while facilitating the participation of private sector measures in the Egyptian economy.”
Regarding the level of 50 pounds that the dollar reached on the first day after the Central Bank’s measures, Moati said: “The level of 50 pounds is very exaggerated,” refusing to give a specific price at the present time, but he expected an increase in the value of the pound in the coming days.
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