CAIRO: The Egyptian pound reached 5.7038 against the dollar this week, its lowest point since January 2007.
According to the Economist Intelligence Unit (EIU) Egypt country report for August 2010, however, the country can expect foreign reserves to increase as traditional sources of foreign currency pick up allowing Egypt’s central bank to intervene to prevent sharp swings in the exchange rate.
“Capital inflows will be more moderate than in recent years, but rising Suez Canal receipts and a revival of tourism will lift foreign exchange reserves,” the report said.
According to the Central bank of Egypt (CBE) provisional net international reserves reached $35277.0 million at the end of July 2010.
“The exchange rate is driven in large part by capital flows and developments with the US dollar. In the second half of 2008 and early 2009 significant portfolio and other capital outflows and a strengthening of the US dollar led to some depreciation of the Egyptian pound,” said the report.
The EIU report finds that a large interest-rate differential and a robust economy compared with much of the rest of the world have attracted carry-trade inflows causing the pound to appreciate steadily over the past year but adds that the trend has now reversed.
“The pound is forecast to depreciate slightly over the forecast period (through 2011), averaging LE 5.61 to the dollar,” the report concludes.
On Wednesday, Reuters reported that the Egyptian pound touched a 3-1/2 year low against the US dollar, testing strong 5.70 area resistance (the March 2009 peak) against the Egyptian pound. The pattern would be a classic sign that the dollar’s uptrend is resuming and would target the 5.76 area.
Hany Genena, chief economist at Pharos Holding, explained that capital inflows are the key in deciphering why the exchange rate has depreciated.
“Over the last month there has been volatility in markets worldwide as the negative macroeconomic figures being announced in the US — such as the high unemployment rate and alarmingly low home sale figures — have caused investors to panic pulling their money from emerging markets like Egypt,” he explained.
Genana added that although the CBE has the ability to intervene in the exchange rate with the dollar, it may not do so as the exchange rate against the euro remains unfavorable to export and tourism growth.
He said that the government may be refraining from any interventions in the pound/dollar exchange rate in order to allow the pound to depreciate further against the euro and stressed that one must look at the big picture when it comes to exchange rates.
According to the CBE, the market rate for the euro was at LE 7.1816 Tuesday and according to the EIU report this rate will decrease to LE 6.69 in 2011, which the report cites as unfavorable for exports and tourism revenues.
Genana said that the pound’s depreciation against the euro should top Egypt’s priorities, as it is Egypt’s main trading partner.
“This exchange rate,” he said “is severely affecting the Egyptian economy, particularly export businesses and something must be done soon to improve it,” he concluded.
“I think that what we’re seeing right now with respect to the recent depreciation in the pound against the US dollar is more exogenous factors at play and reflective of movements in dollars (its recent strengthening against the euro) rather than domestic fundamentals which we continue to see as stable and improving,” said Mohamed Rahmy a research analyst from Beltone Financial in an emailed statement.
“On the supply side you’ll find that the key sources of foreign exchange have been exhibiting gradual signs of recovery, especially when in comparison to levels seen last year. Tourism is picking up, Suez Canal receipts have rebounded from last year’s lows and remittances are also gradually improving,” he added.
He also said that FX demand (which mainly comes from the corporate sector and importers) “is resilient as imports growth continues, as anecdotal evidence shows, albeit not to the degree that would create FX shortages, as economic environment gradually recovers,” he explained.
According to Rahmy, foreign exchange supply usually increases over the second half of the year, which will further slow down the rate of depreciation of the pound against the dollar.
Beltone has a positive outlook on the fundamentals this year, “which will provide some support to the pound; likely to end the year at the LE 5.65 level,” Rahmy added.
In terms of the impact of recent surge in wheat prices, however, he pointed out that wheat represents around 5-6 percent of Egypt’s non-oil imports having insignificant impact on the import bill.
“The effect therefore on the currency would not be significant considering that the increment in import costs is not high,” he added.
“The rise in wheat prices could only negatively impact import costs if sustained for a while and the situation in Russia is not counterbalanced by increased supply to Egypt from another wheat source,” he concluded.