The EGP has so far weathered the global storm. What’s next? Egypt appears to have “weathered the worst of the capital flight [from emerging markets, prompted by covid-19] while keeping its import cover largely intact … and avoiding a non-orderly depreciation,” Renaissance Capital head of MENA research Ahmed Hafez writes in a note out yesterday.

The EGP has fallen just 1% to 15.69 against the greenback since late February, a period in which most emerging market currencies have plunged to multi-decade lows. RenCap now sees the EGP easing to a familiar EGP 17.00-17.50 against the greenback, and notes that “on the upside, we could see foreigners coming back to the debt market (assuming one-year CDS drops another 50-75 bpts) as investors seem to be changing their stance globally.” Capital Economics, meanwhile, suggested in a note earlier this week that that’s the result of the central bank guiding the market. The consultancy sees policymakers allowing the EGP to weaken over time, cautioning that an overvalued EGP will “further weigh on Egypt’s external competitiveness.”

The central bank’s policy response to what’s going on right now is a delicate balancing act. The bank needs to maintain an interest rate that is low enough to give the government room to maneuver in its policy response (without blasting its fiscal deficit target). Low rates also encourage savers and businesses to put capital to work rather than leaving it parked in high-interest deposits. But on the flip sides, rates need to be high enough to keep the twitchy carry trade engaged amid a global meltdown.