Traders are convinced Egypt won't resist the pressure to weaken the pound for long. The black market for dollars on Cairo's streets has re-emerged for the first time since April, signaling investors and businesses are betting the pound's official rate of 7.83 per dollar no longer represents its true value. Forward contracts imply a 20 percent weakening in 12 months and the foreign-listed shares trade at a 12 percent discount to local prices. If the signs are right, Egypt may follow nations such as Kazakhstan and Vietnam that were forced to depreciate their currencies after China's shock yuan devaluation on Aug. 11. The North African nation, which weakened its currency peg twice in 2015, can't afford the loss of export competitiveness as it seeks to boost foreign-exchange holdings that have barely recovered from a plunge that wiped out more than half of them following the so-called Arab Spring protests four years ago. "China's devaluation is pushing all emerging markets to do the same to stay competitive, leaving Egypt with no choice but to follow suit," said Omar al-Shenety, the managing director of Cairo-based investment bank Multiples Group. "Investors see this, as well as the increased monetization of government debt and slow recovery of foreign direct investment and tourism, as reasons for the pound to weaken." Egypt's central bank has kept the pound's dollar peg steady for three months as it fights to curb inflation in a country where almost half of the population lives below or near the poverty line. The strategy risks exacerbating an already widening trade deficit – Egypt imports almost triple what it exports – and turning away foreign investment. Since the yuan devaluation, emerging-market currencies have tumbled. Brazil's real, Russia's ruble and Colombia's peso have each lost 7 percent. That has added to the depreciation pressure on controlled currencies such as the Egyptian pound. One-year pound forwards traded at 9.775 Wednesday. They reached 10.125 on Aug. 24, the lowest prediction since Bloomberg started tracking the data in 2007. On average, the overseas listings of Egypt's most liquid stocks were trading at an implied value of 8.8487 pounds a dollar at 9:45 a.m. in Cairo, compared with 7.81 at the end of June. Cairo's streets witnessed the dollar trading outside banks at 8.033 pounds, a 2.5 percent discount to the pound's official value of 7.83. That's the first time since April the unofficial price has broken outside the central bank's approved range. Foreign investors have dumped nearly all of the $10 billion of local government debt held before the 2011 Arab Spring. President Abdel Fattah al-Sisi's policy changes – such as cutting fuel subsidies – and billions of dollars from Gulf Arab allies have boosted economic growth, though it's still falling short of prerevolution levels. The central bank has devalued the pound twice this year, most recently in July. The currency is down 8.7 percent in 2015, the most in the Middle East behind Algeria's dinar and Iran's rial. The pound "remains massively overvalued," said Anthony Simond, London-based investment analyst who helps manage $13 billion of emerging-market debt at Aberdeen Asset Management. "The reason we and many others haven't come back to the local market is because we expect some kind of depreciation in the future. Decision-making is very opaque, which makes the risk-reward picture unappealing for us."
