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| EGYPT's Demand for Currency Devaluation Grows Louder and Longer As Crisis Approaches |
Some Wall Street banks have warned that the pressure on the currency has increased and the central bank may allow further depreciation.
According to Citigroup, demand for the dollar is growing and will not abate unless currency flexibility and investment flows are strengthened. Half-measures weren't enough, trading stalled and Egyptian government bonds underperformed.
Market sentiment also reflects Egypt's review of her October pledge to move to a floating exchange rate, which helped secure her $3 billion deal with the International Monetary Fund. However, the pound has held a brief lead for several weeks as the domestic inflation outlook remains the focus of officials, especially after rising fuel prices and just days before the holy month of Ramadan. Goldman Sachs Group Inc. economist Farooq Sousa said in a note that trading was "relatively unchanged" since the January devaluation "despite clear signs of continued foreign exchange liquidity constraints." said it is putting pressure on the currency that is being used.
Ahead of the first review of his IMF program this month, derivatives markets have seen the pound's decline deepen despite three currency devaluations in the past year that have nearly halved its value. indicates that
Currencies 1- and 12-month contracts in the non-deliverable futures market posted 10th week losses in the five days to Friday. This is the longest data streak of its kind, dating back to 2007.
As another indicator of devaluation expectations, Commercial International Bank's depository receipts are trading at a 14% discount to Cairo shares on the London Stock Exchange.
Egypt will have to loosen its grip on the pound "sooner or later", said Edwin Gutierrez, head of emerging market sovereign debt at Abdon in London. "It's still a very regulated currency, and funds don't want to see it, or emerging market bond managers don't want it," Gutierrez said. “Equilibrium is for weaker currencies that cause higher inflation because they do not receive capital inflows.”
The Arab world's most populous country is again struggling to clear billions of dollars of imports blocked at its ports.This has created an unmet demand for foreign currency and prompted a Russian invasion of Ukraine. The impact on one of the world's largest buyers of commodities such as wheat has worsened.
The current backlog is estimated at about $4 billion, up from just $2.5 billion in January, according to Citigroup. Foreign currency deposits in January saw their biggest rise since July, according to last week's report. Amid investor panic and doubts about the progress of asset sales, the government said it had launched proposals for two military-related companies this week and was planning proposals for four more large companies.
Inflation far exceeded expectations in February, which could force central banks to raise rates by up to 300 basis points at their meeting later this month, according to Goldman Sachs.
In February, policymakers defied most analyst expectations when they said they would leave borrowing costs unchanged for the first time since September and assess the impact of an overall 800 basis point hike in 2022.
A weaker sterling poses an inflationary risk, but could help ease pressure on Egypt's balance of payments and make its cash shortage more manageable.
In the non-delivery futures market, the pound's one-month contract has fallen about 4% to 32.6 on the dollar since his late February, while the 12-month contract is at about 38.
Non-deliverable futures contracts allow investors to value exchange rates and cover the difference between the agreed rate and the actual dollar price.
The pound was trading near 31 against the dollar on Monday. It has fallen about 2% since late January, less than the losses of the Russian ruble, Argentine peso, Zambian kwacha and South Korean won. According to Citigroup, Egypt's currency's real effective exchange rate is 23% lower than its average over the past decade.
