Devaluation diagnosis

It was a long-awaited step, but how will it affect the economy? Sherine Abdel-Razek assesses the impact of the recent devaluation on local business
The Central Bank of Egypt's (CBE) recent devaluation of the pound to the dollar by six per cent has totally changed the picture in the forex markets.
The once empty exchange- bureaus, echoing to the refrain, "sorry we don't have dollars to sell," returned to normal, with brisk transactions and ample supply of the green currency. Mohamed Hassan El-Abyad, head of the Foreign Exchange Section at the Federation of Egyptian Chambers of Commerce, said earlier this week that exchange offices fully abide by, and are happy with, the new system. He predicted that there will be more stability in the foreign exchange market in the coming months, and referred to a 40 per cent hike in the volume of transactions in exchange offices since the introduction of the new system.
For the first time since January, when the government announced its managed peg system, bureaus were able to cover individual demands as high as $5,000. The obvious withering of the black market has also encouraged buyers and sellers to trade the currency they have been hoarding for so long.
But there is still evidence of tightness in the market. Most bureaus sold a dollar for as much as LE4.2745 -- the highest rate allowed under the new official band. And while dollars were also available in banks, strict measures have been applied on sales of the US currency; several private banks have restricted sales to $300 per client. Banks offered dollars at an average price of LE4.19.
The low liquidity in banks came despite the CBE's announcement that it would supply dollars to any bank to cover its dollar needs. Dealers said the central bank was selling dollars to cover banks' transactions, but not in large amounts. The inter- bank rates, (the rates at which banks lend to each other overnight), also showed no real movement.
Commentary on the move was almost as abundant as the number of transactions resulting from it. The International Monetary Fund praised the devaluation as a means to "bolster export and economic growth." Investment bank ABN AMRO Delta issued a report giving a variety of opinions about the expected negative and positive effects. Other than eliminating the black market and valuing the pound more realistically, the report said the move would help revive tourism in Egypt after the recent devaluation in Turkey had negatively affected the industry, by making visits to Turkey so cheap.
Other benefits ABN AMRO expects include enhancement of exports, now made cheaper, and increased demand for local Egyptian products, given that the cost of imported substitutes will now rise.
Expected negative effects include a retreat in the purchasing power of the pound. This will raise government expenditure, with the bill for basic imported commodities such as wheat and sugar increasing. The devaluation will also burden companies whose business depends on imports.
The report also says that the move will positively affect the local stock market, with prices falling to attractive levels. But a report by EFG-Hermes points out that some companies will be less fortunate than others.
The report judges that market leaders Orascom Telecom (OT) and MobiNil will suffer thanks to their dollar denominated foreign debts. But EFG-Hermes believes that OT will be able to compensate for that burden with revenues from its non- Egyptian subsidiaries. EFG- Hermes also commented that short-term pain may be neutralised by a dollar inflow, should the recently announced intention to sell the African subsidiary, Telecel, materialise.
As for MobiNil, the expected "higher subscriber growth, due to gradual economic recovery, would neutralise the exchange rate effect in the medium to long-term," remarked the report.
Among the companies that will reap the benefits of the devaluation is local carpet manufacturer, Oriental Weavers, which has over 50 per cent of its revenues in dollars. The devaluation will also be a fillip to its export ambitions. The company is also believed to benefit from its significant dollar time deposits, which will now be revalued. But the devaluation may result in smaller profits from local sales.
A general look at the capital market performance in the week following devaluation, shows what traders called "investors regaining confidence in the market." Foreign investors have become net buyers, not sellers, because prices are now cheaper. The value of foreign orders came to LE24.3 million, compared to LE20.8 million worth of sales. And the Capital Market Authority (CMA) has achieved a 6.5 point increase, to close at 590 points.
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