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Thursday, 12 January 2023

EGP breaks the 30 barrier against the USD before settling at 29.76

The EGP tumbled to a new all-time low against the greenback yesterday as authorities continued to transition to a fully flexible exchange rate as agreed with the IMF. The currency fell in the interbank auction by a little over 16% to 32.20 to the USD by 1pm before rebounding to close at 29.76 per the official central bank rate. It closed down 7.5% from Tuesday.

This was the largest single-day loss for the currency since October, when it fell more than 16% in tandem with the central bank announcing its decision to move to a “durably flexible” exchange rate. The EGP has now lost more than 50% of its value against the USD since October and is down almost 90% since the central bank first devalued the currency last March.

How much changed hands yesterday? The banking sector saw USD 650-750 mn change hands through the interbank market yesterday — as much as five times the recent daily average, state news agency MENA reports, citing an unnamed banking source. Blom Bank former Deputy Managing Director Tarek Metwally put the figure at some USD 650-700 mn in a phone call to Masaa DMC’s Ramy Radwan (watch, runtime: 9:48), saying that the increased liquidity was to thank for the cooling of the rate from its earlier peak during the day.

Where did the money come from? Some USD 250 mn came from foreign institutional investors, the MENA source is quoted as saying, with Metwally naming JPMorgan and Morgan Stanley as among them.

A GOOD SIGN- Yesterday’s fall appears to have dealt a blow to the (anemic) black market, with a number of traders saying they were suspending operations until the end of the day, according to Bloomberg. The greenback has been trading at more than 30.00 in the black market, which has reemerged in recent weeks in response to an ongoing shortage of foreign currency.

It was a volatile day on the EGX: The benchmark EGX30 index rose as much as 4.4% during the morning before erasing most of its gains to close just 0.4% higher. The EGX has been one of the world’s best-performing indexes (in local-currency terms) since the October devaluation, soaring more than 47% to its highest level since 2018.

WHERE DO WE GO FROM HERE?

The EGP could well continue to lose a bit of value in the days ahead, some pundits suggest. “[The latest EGP slide] by itself might not be enough to bring private capital back, until there are signs that the FX backlog is getting cleared, which would require new USD liquidity. There is currently no visibility where this liquidity will come from," Abu Dhabi Commercial Bank economist Monica Malik told Reuters. Speaking to Bloomberg, Standard Chartered economist Carla Slim said that “the EGP will remain under pressure until more USD inflows materialize.” Blom Bank’s Metwally says “prices are projected to decrease within a month as the availability of the greenback in the banking sector increases.”

The offshore market agrees: Non-deliverable forwards (NDFs) — contracts used to forecast the value of the currency over the next 3-12 months — rose to 32.64-35.40 in trading yesterday, according to Reuters.

Higher yields might be needed: The EGP is inching closer to levels attractive to foreign investors, but yields on local debt will need to rise further to bring them back into the market in large numbers, Kevin Daly, emerging markets fund manager at investment firm Abrdn, told the Financial Times. “I wouldn’t expect to see a big inflow of USDs into the market until you get an adjustment higher in rates,” Daly said. Yields on short-term government bonds will likely need to rise another 1000 bps to 30% before Egypt starts seeing sizable inflows into the local debt market, he said.

That could mean more rate hikes: HSBC expects the CBE to raise interest rates by 300 bps during the quarter to curb inflation and bring foreigners back into the market. Al Ahly Pharos expects a 200-bps hike, potentially at the next Monetary Policy Committee meeting in early February. Goldman Sachs said earlier this week we could see “increases in local rates in the coming days” even as the CBE allows the EGP to float.

Where’s the sweet spot? In a note earlier this week, HSBC pegged the market clearing rate at between 30.00 and 35.00, with 32.50 “as a tentative midpoint,” while Goldman Sachs thinks we’re looking at 33.00-35.00. Meanwhile, BNP Paribas yesterday reiterated its December forecast for the USD-EGP rate to fall to 37.00 this quarter.

Prepare for more inflation: The weakening currency has already caused inflation to accelerate at its fastest rate in five years.

EGYPT IN THE NEWS- As coverage from Bloomberg, Reuters and the Financial Times above suggests, yesterday’s USD-EGP movement is dominating the conversation on Egypt in the global business press.

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