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Tuesday, 18 December 2018

Egypt “paving the way” for a weaker EGP with simplified FX policy -Capital Economics

Egypt “paving the way” for a weaker EGP with simplified FX policy, says Capital Economics: The EGP will likely weaken by end-2019 as policymakers work to “simplify the country’s exchange rate setup,” Capital Economics said in a research note out yesterday. Recent moves by the Finance Ministry and CBE including scrapping the discounted customs exchange rate for non-essential imports and terminating central bank’s parallel FX repatriation mechanism “are steps in the right direction, [but] highlight that FX policy is still complex,” the research house writes.

Expect the EGP to slide “modestly” against the greenback by the end of next year: The moves come as there has been mounting speculation that the CBE was pushing state-owned banks to prop up the EGP — which Capital Economics was the first to flag, with Reuters following suit last month. This policy, Capital Economics notes, will not be sustainable for much longer and “the next step is likely a reduction of backdoor FX intervention” that will ultimately result in the EGP falling “modestly” to EGP 19 against the greenback by the end of next year.

Where do we stand on interest rates? Capital Economics sees the CBE resuming its monetary easing cycle in early 2019, by which time it expects headline inflation to fall further. The CBE has kept interest rates on hold since May to help contain inflation and slow down outflows of hot money from Egypt amid the emerging markets sell-off.

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