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Tuesday, 23 August 2016

We are weeks away from an EGP adjustment -EFG Hermes

Devaluation within weeks? EFG Hermes sees the pound stabilising at EGP 11.50 post-float.  EFG Hermes Research’s Mohamed Abu Basha said in a note published yesterday that Egypt could be as little as a few weeks away from devaluation. The government will be able to build USD 7-8 bn in reserves by late September or early October, providing a decent buffer to begin the float. Key during the adjustment period, Abu Basha says, is Egypt’s ability to attract capital inflows — particularly the revival of the carry trade. Domestically, he expects demand to come under intense pressure over the next 6-12 months. Among the other takeaways:

Where’s the EGP going to settle? “We see the level of EGP11.5 as a potential point of stabilisation for the EGP post a float process. Such expectation is built on parallel market movements over the past few months, as well as real effective exchange rate (REER) calculations.”

Be Argentina, not Nigeria (or: rip the Band-Aid off): Nigeria floated the Naira, then “started to manipulate the market, insisting on a narrow band of trading for the currency against market expectations,” with the result being foreign investors turning away and a widening gap between the official and parallel markets. In Argentina, by contrast, devaluation was “a fully market-driven adjustment for the peso with minimal intervention. The process quickly built up credibility and attracted capital inflows within a relatively short period of time.”

Watch Abu Basha’s video guide to the EFG Hermes research note here (runtime: 03:55).

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