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Tuesday, 11 June 2019

The question on everyone’s lips: Where is the EGP heading?

ANALYSIS- The question on everyone’s lips as we ponder the kickoff of budget season at most companies after the summer break: Where is the EGP heading? The EGP has been on a good run this year, appreciating by about 7% YTD against the USD to 16.7917. But this isn’t set to last: analysts polled by Enterprise predict that a period of depreciation will set in later this year, although few are speculating on a specific FX rate at the moment.

It’s a matter of seasonality, says Mohamed Abu Basha, head of macroeconomic analysis at EFG Hermes. “We might see some additional appreciation in the coming months due to seasonal conditions of low demand during the summer. But seasonality won’t be as supportive to the EGP in 4Q when demand for FX typically picks up ahead of the new year and when foreign investors look to repatriate profits,” he noted. He said the appreciation in the past couple of months was backed by low demand for FX rather than foreign inflows into debt.

Have we hit peak EGP? HC’s Sara Saada thinks the EGP's rise has peaked at both the carry trade and remittance levels. The EGP should stabilize for a while before it begins to gradually depreciate by the end of the year — “especially if there is an easing in interest rates that would spark profit-taking by investors.”

How far could the pound fall later this year? Barring a dramatic pick-up in external headwinds, FX volatility should remain low and any EGP depreciation will occur at a gradual rate. Pharos’ Head of Research Radwa Elswaify told us that we can expect the EGP/USD rate to hover between 16.50 and 17.50 through the end of 2019 depending on inflows and appetite for Egyptian debt.

Could we go back down to EGP 18 per USD? Capital Economics has predicted that the EGP will fall by around 7% to EGP 18 by the end of 2019. Higher-than-expected inflation in some of Egypt’s key trading partners will increase the likelihood of a devaluation to maintain the currency’s competitiveness.

This was not so far off from what analysts were saying a few months ago: EFG Hermes said in March that the EGP would hover between 17.45 and 18.00 to the greenback throughout the year, taking into consideration that the attractiveness of the EGP carry trade will diminish if the currency appreciates by more than 4-5%. The firm had predicted that the currency would stabilize at 17.10 in the short term with increased volatility in 2H19 when investors are more likely to repatriate profits. Shuaa Securities Egypt, meanwhile, said last month that the currency could slide back to the high EGP 17 range after the government makes further cuts to fuel and electricity subsidies next month.

Why has the EGP been appreciating? Some analysts have cited increased inflows from portfolio investors as the main reason for the appreciation in addition to a reduced imports bill and increased tourism receipts. Shuaa points to many of the same factors. Unnamed bankers speaking to Reuters earlier this year speculated about whether the CBE was manipulating the currency.

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