The comeback of the pound

CAIRO - 25 January 2018: As Egypt’s economic reform program started to bear some early fruits with a leap in foreign currency inflows, remittances from expatriates and foreign reserves as well as a modest rebound in exports, tourism and FDI, the local currency which had plunged 50% following its flotation in November 2016, is predicted to regain some strength against the dollar during
2018.

Over the past 13 months, the state has introduced a set of tough austerity measures as part of its comprehensive reform program which was endorsed by the International Monetary Fund (IMF). Free-floating the pound, slashing energy subsidies, approving a civil service law and introducing a long-awaited value added tax (VAT) we were necessary for Egypt to clinch the IMF’s $12 billion three-year extended facility loan.

The reform program, while necessary to reinstate macroeconomic stability and promote inclusive growth, strained Egyptians’ purchasing power dramatically, as inflation rates hit record levels. The pound’s value against the dollar almost halved to approach LE 20 per dollar in December, 2016 before holding steady at around LE 17.60-18 over the past months.

But economists expect a strong recovery for the economy in 2018, which will definitely
boost the pound’s value. “The pound is predicted to rebound in 2018 for some economic
and political reasons, coupled with indicators of economic recovery,” economist Mohamed Elnozamy told Business Today Egypt. He adds that the toughest decisions have been taken and the situation will only get better from here on.

Economy on the right track

As production from Egypt’s Zohr gas field, the Mediterranean Sea’s largest offshore field, started at a capacity of 350 million cubic feet a day last month, the country is close to realize its ultimate goal of securing its energy needs and becoming self- sufficient.

Minister of Petroleum Tarek el-Molla said earlier that initial production from Zohr is equivalent to three LNG import cargoes monthly with a total cost of $60 million. The first phase of the project will be finalized in June 2018, when production will hit more than
1 billion cubic feet a day, saving around $180 million a month.

“Full-capacity production from Zohr, along with other gas fields, including BP’s West Nile
Delta field, will help Egypt’s government save about $4 to $5 billion annually by depending on home-produced gas instead of the very high cost LNG,” Elnozamy said.

This is the top economic factor that will drive the economic growth and ease pressure on the pound over the coming period by reducing demand on the dollar for securing the country’s gas imports, he explained.

Another key supporter to the pound’s potential recovery is the bounce back in tourism
as the number of tourists coming to Egypt soared by 55% in the third quarter of 2017,
exceeding 2.3 million tourists, compared to approximately 1.5 million tourists in the same period a year earlier, the state statistics body CAPMAS announced in its monthly report issued in November 2017.

It was also reported that Egypt’s tourism revenues skyrocketed 170% in the first seven months of 2017, registering $3.5 billion, according to official statements
to Reuters.

“This recovery, along with the upcoming resumption of Russian flights between Cairo
and Moscow, will bolster the local currency and the economy, which is highly dependent on the tourism sector for hard currency and job creation,” said Elnozamy.

Remittances from Egyptians abroad also rose by about $4 billion, totaling $24.2 billion compared to $20.2 billion during the same period in the previous fiscal year.

Attributing the increase to the pound flotation, the Central Bank of Egypt (CBE) announced that total remittances rose during October 2017 by 38.9% to a record $2.2 billion, compared to roughly $1.6 billion in the same
month a year earlier.

Dollar inflows from Egypt’s six main sources of the American currency doubled during the first three months of FY2017/18 to $24.9 billion, up from $12.7 billion during FY2016/17, according to official data from the CBE.

The jump in dollar inflows resulted in increasing total surplus in the country’s payments balance to $5.1 billion during the first quarter of FY 2017/18 against $1.9 billion in the same period of the previous fiscal year.

Foreign investments in government debt reached $7.5 billion in Q1 of FY2017/18, compared to $841 million during Q1 of the past fiscal year, a sign of growing confidence in the economy. Remittances of the first quarter of the fiscal year 2017/18 hit $6 billion, compared to $4.4 billion in the previous year.

Exports went up to $5.8 billion from $5.3 billion last year. Tourism also climbed up to $2.7 billion from $758 million during first three months of FY 2016/17.

However, FDIs recorded a decline, falling to $1.6 billion down from $1.9 billion of the first
quarter of the past fiscal year. Suez Canal revenues reached $1.4 billion Dollar flows to Egyptian banks jumped to more than $57 billion since the pound flotation,

Deputy Governor of Egypt’s Central Bank Gamal Negm told Business Today Egypt. At the end of November, foreign reserves amounted to $36.723 billion, the highest level since the pound float, and sufficient to cover nearly seven months of Egypt’s strategic commodity imports. This rate is higher than the three months’ international average.

Optimistic scenario

“Analysis of the pound’s technical charts [points] as well to a potential appreciation to
15.2 to 15.4 per dollar in the second quarter to 2018, after touching 18.1 per dollar,” Elnozamy said.

“Exchange rate liberalization and stabilization of the Egyptian pound at around 17-18
to the US dollar have bolstered investor confidence, leading to a significant increase in capital inflows,” global rating agency S&P said in a November report.

“The FX rate will generally fluctuate between LE 16.5 and LE 18 to the dollar as the inflows from tourism, household and corporate FX [foreign exchange] sales to banks, and remittances mainly counter the household and corporate demand for FX for personal expenses and import financing,” Reham El Desoki, senior economist at regional investment bank Arqaam Capital, said in a research paper.

However, Desoki forecasts a slight temporary appreciation toward the beginning of February, coinciding with the Chinese New Year when imports from China freeze, reducing the demand for trade financing for the period of
the New Year holiday in China. As foreign exchange reserves continue to
rise as economic growth strengthens, S&P revised its outlook on Egypt to positive from
stable, affirming a ‘B-’ long-term and ‘B’ shortterm ratings.

“The positive outlook reflects a potential upgrade over the next year if Egypt continues
to implement structural reforms to support investment and growth, if external weaknesses abate, and if further progress is made in improving the effectiveness of the monetary framework,” the rating agency said in a statement.

An additional positive indicator that the economy is on the right track after the government embarked on the reform program was the significant shrink in the country’s current account deficit, narrowing by 12.4% to reach $13.2 billion in the first nine months of the fiscal year.

The current account deficit measures incoming and outgoing goods, services and
transfers

S&P forecasts the current account deficit to narrow gradually to 4.1% of GDP by fiscal year 2020, down from 6.8% of GDP in 2016/17. “We expect the deficits to be financed primarily by rising FDI inflows and public external debt.”

Egypt’s trade deficit declined 5% to reach $8.9 billion for the quarter, down from $9.4
billion in Q1 of 2016/17. This largely came on the back of an 11% increase in merchandise exports to $5.8 billion, up from $5.3 billion in the same period last year.

Egypt’s oil exports grew 16.8% to $1.8 billion in Q1 of 2017/18 from $1.5 billion a year earlier. In addition to these economic drivers, economists argue that the pound is projected to appreciate for political reasons, with President Abdel Fattah al-Sisi planning to run for a second term in the upcoming elections this summer.