Egyptian pound shows signs of correction: Beltone

Total outstanding liability to register at $7.6bn and $12.2bn in FY 2017/18 and FY 2018/19 respectively

The Egyptian pound has showed some sings of revaluation, for the first time in three months, the Egyptian pound strengthened against the US dollar, gaining 0.7%, trading at EGP 17.95/USD on 3 July 2017. The three largest public banks, namely the National Bank of Egypt, Banque Misr, and Banque du Caire traded the local currency at EGP 17.89/USD, EGP 17.95/USD and EGP 17.95/USD respectively. According to a report published by Beltone Financial.
Beltone Financial forecasts that the Egyptian pound will gain between 1-1.5% by December 2017 due to the maintained level of foreign currency liquidity. The report cites that Beltone Financial expect that the value of the Egyptian pound to register between 16.6-17.1 against the US dollar and to stabilise at an average of 16.8 EGP/USD for fiscal year (FY) 2017/18.
Moreover, the report indicates that the exceptionally attractive yields coupled with the devalued local currency advocated the steady inflow of portfolio investments, with $54bn of fresh funds flowing into the system since flotation of the currency in November.
Consequently, this supported a positive shift in the banking sector's net foreign assets' position to mark a surplus of $3.8bn in May 2017 against a deficit peak of $11bn in December 2016 and a reduced deficit of $0.4bn in April 2017, according to the report.
However, removing the capital restriction, which where previously applied by the Central Bank of Egypt (CBE), will act as the final test for demand size, the report states. Beltone Financial expects that the CBE to gradually shift their stance after testing the ability to cater for the real existing demand following the clearing of the repatriation back log, as well as the removal of capital transfer restrictions.
The report states that this view is supported by an adequate reserve shield that jumped 35% since November 2016 to comfortably cover 6.5 months of imports in May 2017, up from a low of 3.1 months in June 2013.
Furthermore, the report indicates that the downward pressures on the Egyptian pound will gradually decline in the future, as the supply and demand dynamics settle. However, due to the rising foreign liabilities with excessive borrowing, the total outstanding liability is expected to register at $7.6bn and $12.2bn in FY 2017/18 and FY 2018/19 respectively. The report forecasts that the rate of the appreciation of the Egyptian pound will be mild over the next three years.
Beltone Financial believes that the foreign exchange rate correction is what is needed to tame inflationary pressures, as it is a cost-push inflation driven by the rising factors of production costs. However, the report forecasts that interest rates will be maintained until the end of 2017, with a possible cut in the first half of 2018.