Egyptian Pound Remains Overvalue After 49% Devaluation
The Egyptian economy has continued to face pressures as key indicators and exchange rate positions weakened. A flood of externalities that hit the country’s performance has been fast, and furious.
Egypt’s pound has lost about 50% since it was devalued last year and its debt position has not improved despite the backup from the International Monetary Fund (IMF).
In its latest macroeconomic update, Score Ratings noted that a curtailed currency devaluation and slower-than-expected privatisation of state enterprises cloud the outlook for stabilising Egypt’s external finances as meeting IMF conditions is critical for shoring up international reserves and investor confidence.
President Abdel Fattah El-Sisi has ruled out another devaluation of the Egyptian pound despite the central bank’s commitment to introduce a “durably flexible exchange rate regime” as part of the IMF Extended Fund Facility approved in December 2022.
According to Score Ratings report, Egypt has devalued the pound by 49% since January 2022, but the currency remains overvalued, with 12-month forward rates trading above 40 Egyptian pounds to USD 40, or about 23% weaker than the official rate of EGP/USD 31.
Analysts believe that overvalued exchange rate hampers the privatisation of state- and military-owned enterprises, a necessary condition to meet an IMF target of accumulating net international reserves of USD 23 billion, originally by end-June.
The International Finance Corporation, the private-sector arm of the World Bank, has started to advise Egypt on privatisations, but the process remains challenged by the uncertainty in foreign-exchange markets, a major impediment for foreign investors looking to value Egyptian assets up for sale, Scope Ratings said in the update.
It is noted that to date, Egyptian authority has reportedly sold stakes in state-owned businesses worth USD 1.9 billion out of an estimated USD 2bn in possible disposals.
Although recent progress on privatisation may help approval of the first review of the IMF programme, uncertainty remains about Egypt’s capacity to sustain this momentum in the longer run and privatise at least 32 state-owned companies.
The El-Sisi government’s likely cautious economic policies ahead of general elections, set for end-2023 to early 2024, will hinder progress on the currency front, as a further devaluation of the pound would aggravate inflation potentially fuelling social discontent.
The country’s consumer price index rose to 36.8% year on year in June 2023, after 33.7% in May, 2023 as global economic pressure hit Egypt, driving monetary policy tightening.
“Egypt is likely to face a squeeze in its sources of external funding if it struggles to meet IMF conditions – among which a privatisation target of USD 4.6 billion in 2023/2024 – given the bond repayments falling due”, Scope Ratings projected.
In addition, analysts explained that at least debt service on international bonds accounts for only a modest share of overall public and publicly guaranteed external debt that is owed mostly by the government and central bank to official-sector creditors.
The authority is faced with the risk of renegotiating with IMF despite some progress on record should devaluation and privatisation plans fall short of initial expectations,
Egypt may have to renegotiate the IMF arrangement as relinquishing state control over the economy is the main condition for strengthening external resilience.
“Even though completion of the first IMF review was postponed by a couple of months, there is some progress such as a draft law eliminating tax exemptions for state-owned entities that would bring taxation of the state sector more in line with that for the private sector”.
Scope Ratings said such reform is unlikely to have a material impact on short-term economic activity, but it could contribute to raising Egypt’s longer-run growth potential estimated at 5.5% per year, above the 4.0% growth projected for this year.
Analysts believe that international creditors are likely to provide near-term flexibility to keep the IMF programme on track, encouraged by recent progress on privatisation involving GCC investors.
Egypt is one of the biggest beneficiaries of IMF support, while also being an increasingly important partner of Europe – in terms of Europe’s energy diversification and regional security, according to the ratings note.
The country also benefits from the dynamism of Suez Canal shipping fees, tourism receipts, and remittances that ease near-term pressures on supplies of foreign currency and help meet the country’s gross external financing needs, estimated at more than USD 20b billion in 2023, or about 5% of GDP.
Even so, drawing foreign currency from local banks is proving difficult as the net foreign-asset position dropped to a record minus USD 24.4bn at the end of June 2023. Tapping international markets is also challenging. #Egyptian Pound Remains Overvalue After 49% Devaluation Chinese Yuan Strengthens to 7. 1406 Against the Dollar