The coronavirus (COVID-19) pandemic has already hugely and unpredictably impacted global economies, having forced economic activities to grind to a halt, and negatively affecting almost all economic sectors, including the currency market.
Banking expert Mohamed Abdel-Aal said that the recent depreciation of the Egyptian pound against the US dollar is normal considering the ongoing economic conditions due to the pandemic.
Abdel-Aal told Daily News Egypt that the latest decline in the local currency value was temporary, referring to 12 factors that would support the Egyptian pound in the coming period.
The US dollar in banks operating in Egypt appreciated gradually against the Egyptian pound, recording EGP 16.1489 for purchase and EGP 16.2489 for selling at the end of last week (5 June). This compared to the EGP 15.6989 for purchase and EGP 15.7989 for selling on 17 May, according to the Central Bank of Egypt (CBE).
On 23 February, the US dollar reached its lowest levels against the Egyptian pound in 2020, reaching EGP 15.4964 for purchase and EGP 15.5964 for selling, amid strong foreign exchange flows into the Egyptian market.
Foreign investments in government debt instruments have begun to decline gradually, in light of the coronavirus, but the local currency remained stable against the US dollar, supported by strong foreign exchange reserves.
“We all know that since the start of the successful economic, monetary, and financial reform programme, coordinated with the International Monetary Fund (IMF) on 3 November 2016, notably the floatation of the Egyptian pound, the US dollar price only depends on supply and demand,” said Abdel-Aal
In conjunction with each step of the economic reform programme, the overall economic indicators in Egypt have improved and traditional foreign exchange resources have grown. These have been mainly in remittances, tourism receipts, Suez Canal revenues, and exports. Additionally, the influx of foreign indirect investments in domestic debt instruments has witnessed a remarkable growth.
According to Abdel-Al, all these factors have contributed to balancing the foreign exchange supply with the local demand, to become the second best currency in the emerging market.
He pointed out that most international observers and traders expected the foreign exchange rate would witness stability in 2020, ranging between EGP 13-14 per US dollar by the end of the year.
He explained that this perspective was supported by the increase of Egypt’s natural gas export revenues, the successive growth of the foreign exchange reserves at CBE, and the improvement of Egypt’s creditworthiness. This encouraged the Egyptian government to offer some international bonds in the European market at a reasonable price.
“Several months ago, the Egyptian economy was at its best, and was progressing without obstacles towards achieving an economic breakthrough, according to the plans laid down. Suddenly, the pandemic shocked the whole world and forced unprecedented economic, social, and health circumstances. This negatively affected the exchange markets in the world,” Abdel-Aal said.
“Although the exchange fluctuations, whether in the major or emerging markets, are less severe than 1998 and 2008 crises, the ‘safe haven’ approach prevails among investors in the global exchange markets now. This explains the increased demand for US dollar, Japanese yen, and Swiss franc in March.”
With regard to the Egyptian pound, Abdel-Aal said that, like all currencies around the world, its exchange rate must have been negatively affected, otherwise there would be doubts about the seriousness of free trading mechanism. The current situation has caused all conventional and unconventional foreign exchange resources to shrink. The country has turned to using part of its foreign exchange reserves and requested emergency funding from the IMF under the Rapid Financing Instrument.
The current situation has raised an important question – would the current decline in the Egyptian pound value against the US dollar continue? If yes, for how long? Or would it be only limited fluctuations before the Egyptian pound return to be a safe haven?
Abdel-Ala believes there are 12 reasons that make the current depreciation of the Egyptian pound temporary.
• The country’s success in negotiating with the IMF to obtain an emergency financing of $2.8bn under the Rapid Financing Instrument, to enhance its capabilities to fight COVID-19. Arrangements are taking place also for another loan worth $5bn, of which the first tranche is likely to be provided to Egypt early July.
• Egypt’s success in arranging and issuing dollar-denominated Eurobond offerings worth $5bn with various maturities to provide urgent funding to deal with the coronavirus crisis until the end of the year.
• The state has fulfilled its foreign obligations using part of its foreign exchange reserves, which can cover Egypt’s external needs up to eight months.
• The competitive advantage of the Egyptian pound represented in its high interest rate compared to currencies of major and emerging countries.
• With the inflation reaching single digit rates, the Egyptian pound provides a better interest on the household sector’s savings, than investment in other currencies.
• Positive stimulus monetary policy represented in reducing interest rates on financing to certain sectors through various financing initiatives, accompanied with the National Bank of Egypt and Banque Misr providing of a new one-year savings certificates at a very attractive rate, to encourage the household sector, and to compensate for any damages during the COVID-19 crisis.
A large part of the cash directed to this exceptional new saving vessel was mainly exchanged from the US dollar to the Egyptian pound, or at least prevented more exchange to the US dollar.
• Lower oil prices will save Egypt foreign exchange, as Egypt imports 35% of its fuel needs.
• There is a decline in traditional foreign exchange demand due to suspension of Ummrah, international travel, and lower imports due to the global lockdown.
• The Egyptian pound is not acceptable for payment internationally; therefore, the shocks in global markets have no significant and direct impact on the local currency.
• The clear and serious intention of the state to move resume economic activities gradually, whether in the government or the private sector, which indicates the soon recovery of the Egyptian economy.
• The IMF’s positive outlook for the Egyptian economic reform programme and its ability to absorb external shocks. At the same time, the most prominent credit rating agencies have fixed Egypt’s credit rating with a stable outlook.
• Most countries have announced resuming economic activities and international flights, which suggests the return of tourism and improved Suez Canal revenues.
According to Abdel-Aal, all of these factors support the Egyptian currency during the coming period.
A further question is: What is the expected exchange rate for the Egyptian pound during the next three months?
Abdel-Aal says, before making any expectations, it is important to say that the Egyptian economy and currency, and the shocks we have been exposed to under the repercussions of the coronavirus crisis, should not be separated at all from the global situation. This leaves the whole world facing various scenarios, and uncertainty remains prevalent.
“We do not know for sure when the epidemic will recede or when everything goes back to normal globally, and this means that the fate of currencies around the world remains unknown,” he said.
He added that in spite of all of that, the next support level of the Egyptian pound may be EGP 16.5 per US dollar.
He explained that this price range would be appropriate to encourage exports and tourism, and stimulate foreign investment in domestic debt instruments.
In three months, local and global economies will be dynamic again, and the flow of foreign exchange will begin to return to its normal levels gradually. The US dollar may trade at EGP 16.5 until the end of the year. A further decline in the local exchange rate will not be useful, especially to avoid higher import bill and the risk of increasing inflationary pressures.