Egyptian pound to hit LE17/$ by end of 2020: Capital Economics



Tue, 28 Jan 2020 - 01:21 GMT


Tue, 28 Jan 2020 - 01:21 GMT

FILE - Capital Economics

FILE - Capital Economics

CAIRO – 28 January 2020: Capital Economics expected in a recent report the Egyptian pound-to-dollar to record 17.0/$ by the end of this year and 18.0/$ by end-2021.

It also anticipated that the Central Bank of Egypt (CBE) to resume its easing cycle and lower interest rates by 225bp, to 10 percent by end-2020. The report said that this reduction would in turn reduce the attractiveness of the carry trade.

Moreover, the report clarified that the Egyptian pound has further strengthened at the start of this year but it is now making exports uncompetitive and, with the support of the likely fading high real interest rates, the currency will probably give up some of its gains over the rest of this year and next.

In January, the Monetary Policy Committee (MPC) decided to keep the Central Bank of Egypt’s (CBE) overnight deposit rate, overnight lending rate, and the rate of the main operation unchanged at 12.25 percent, 13.25 percent, and 12.75 percent, respectively. The discount rate was also kept unchanged at 12.75 percent.

“The pound was one of the best performing currencies in the emerging world last year, appreciating by more than 11 percent against the dollar. It has continued to strengthen at the start of this year, rising by 1.5 percent to 15.8/$,” the report stated, adding that the currency is now close to its strongest level since the devaluation in 2016.

According to the report, the rally in the pound comes on the back of a significant improvement in Egypt’s balance of payments position. “The 50 percent drop in the pound versus the dollar in 2016 boosted Egypt’s external competitiveness, supporting exports and encouraging firms and households to shift their consumption away from imports to domestically-produced goods.”

The report also referred to Egypt’s gas production, saying that Egypt has benefited from a boom in gas production, and energy exports have more than doubled since 2016. Egypt was probably a net gas exporter for the first time in six years in 2019.

“The overall result is that the current account deficit has narrowed from a peak of 6.6 percent of GDP in Q4 2016 to around 2.5 percent of GDP in Q3 last year,” it said.

It added that the devaluation and higher real interest rates have supported a pick-up in foreign capital inflows. Despite a sharp drop in inflation over the past few years, the central bank has taken a cautious approach with monetary easing.

“This has left real interest rates among the highest in the emerging world,” it commented.

“But we think that the large gains in the pound are probably now behind us. After all, the currency is starting to look overvalued. Indeed, Egypt’s real effective exchange rate – that is, the trade-weighted exchange rate adjusted for inflation differentials with trading partners – has risen by more than 60 percent from its trough and is now approaching its levels before the 2016 devaluation,” it said.

“Admittedly, the rise in gas exports means that Egypt can now sustain a higher real exchange rate than before. But the recent deterioration in competitiveness has weighed on Egypt’s non-hydrocarbon exports, which have effectively stagnated since mid-2018,” the report stated, clarifying that this is a classic symptom of the so-called Dutch Disease.

It explained that struggling non-hydrocarbon exports mean that any further increase in gas output is unlikely to translate into an additional improvement in the current account.

Capital Economics thought that support for the pound from tight monetary conditions will also fade, adding that inflation will unlikely to breach the mid-point of the CBE’s target range of 9±3 percent on a sustained basis.



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