*** BREAKING NEWS: The Central Bank of Egypt informed the banking community earlier this morning that it has floated the pound to EGP 13.00 per USD 1.00.
The EGP will initially be allowed to fluctuate in a 10% up / down band.
Our friends in the banking community confirm that an extraordinary auction is scheduled for 13:00 this afternoon.
Today would not be a bad day to buy into the equity market…
Editor’s note: We dispatched the flash note above at 08:45 this morning, after the publication of today’s issue. The full, unabridged text of today’s issue is below.
The EGP appreciated sharply against the greenback on the parallel market yesterday. From a low of EGP 18 and change on Monday and EGP 17.50-17.70 on Tuesday night, greenbacks were being priced on Wednesday at EGP 12.00 (per Youm7) to EGP 15.50 (Reuters). This doesn’t mean that today must be devaluation day. It does mean that the state has intervened in the parallel market for FX to restore sanity; other signs suggest devaluation could be around the corner. Here’s our take:
The Ismail government has probably reached an entente cordiale with the exchange offices. As we’ve been saying for a little over a week, the EGP’s free-fall against the greenback in the parallel market isn’t reflective of the pound’s fair value, something Mohamed El Abyad admitted on Tuesday. Who is El Abyad? Essentially the Head Money Changer of Egypt — he runs the FX bureaus section at the Federation of Egyptian Chambers of Commerce. What happened? Motivated by a very real fear of being boxed out of their industry by the state — which has been shuttering FX bureaus, suspending licenses, toughening criminal sanctions, and declaring its interest in opening state-owned bureaux de change — foreign exchange offices have been letting the pound slide. Their aim: To pressure the government into giving them a seat at the table — and leaving them market share post-devaluation.
One of the smartest bankers we know — a household name in the finance industry — says the EGP’s appreciation on the black market yesterday came as the government appears to have gotten its ducks in a row. Importers agreed earlier this week to curtail purchases on the parallel market, and yesterday’s events suggest the government “has come to an agreement with the FX guys. Neither side can afford not to come to an agreement — the showmanship of daily changes in the rate is over.”
What evidence of the entente? As we noted yesterday, El Abyad, the titular Head Money Changer, warned on Tuesday that anyone with an open USD position was running a very risky game as the Central Bank of Egypt would soon take action to “stabilize” the FX rate. “Hoarders will lose out,” he said. In return, the CBE appears to have slowed plans by the National Bank of Egypt to decisively (and, essentially, “within days”) enter the FX market: The NBE has since received central bank approval to open an FX bureau subsidiary next year, with plans to open 10 branches at first, expanding to 25 within three years, said NBE chairman Hisham Okasha. Banque Misr is also looking to expand its network of exchanges.
Rumors that the central bank is going to ban the deposit of FX sourced on the black market are overblown. Picking up where we left off yesterday morning, Reuters reported that “Several banks told Reuters that they had not yet received any formal instructions from the central bank to begin implementing such a rule. An official at Commercial International Bank said, however, that the bank had distributed an internal memo to branches on Wednesday asking them to require documentation for all deposits.” Our friends at CIB tell us that the internal memo was simply a reminder to follow CBE regulations on inbound and outbound FCY transfers as well as transfers between accounts within the bank.
The next real “checkpoint” on the slow, inexorable march toward devaluation will be the Central Bank of Egypt’s reserves report for October, which — if the CBE follows tradition — should be out by Monday. Central bank governor Tarek Amer has previously suggested that a reserve base of USD 25 bn or more would give him the liquidity he needs to consider devaluation.
If devaluation is in the cards in the coming days, the IMF’s Executive Board will have multiple opportunities at which to approve the USD 12 bn extended fund facility for Egypt. The board’s public meeting schedule notes sessions scheduled for 4, 7, 9 and 11 November.
And if devaluation does happen today / Sunday / next week, will it be the end of the world? Are we about to become Venezuela? In a word: No. Read on.