Investors bet on deeper fall in Egyptian pound before IMF approval

74
3
Investors bet on deeper fall in Egyptian pound before IMF approval

The North African nation awaits final approval for a $3 billion loan from the International Monetary Fund, and investors are betting on a deeper slide in the Egyptian pound.

Derivatives traders have stepped up their wagers that Egypt will let its currency weaken by as much as 20% over the next 12 months. With the IMF executive board set to meet on December 16, there is a debate over whether the Washington-based lender will be convinced by the pace of the pound's decline in the spot market since November.

Gordon Bowers, a London-based analyst at Columbia Threadneedle Investments said there were signs that the currency is still being managed and the IMF may need more proof that Egypt has adopted a flexible exchange rate. He expects to see either another devaluation or an accelerated pace of depreciation before the meeting.

Not everyone agrees. Mohamed Abu Basha, head of macroeconomic research at Egyptian investment bank EFG Hermes, said he didn't believe that further weakness for the pound was necessarily conditional before December 16. He said that authorities have taken measures such as canceling subsidized lending programs and drafting a new document on state ownership polices in compliance with the IMF agreement.

The North African nation devalued the pound in March, and then increased by 18% in late October on the same day that it announced the IMF deal. Facing surging import bills and an exodus of foreign money exacerbated by Russia's invasion of Ukraine, Gulf allies have rushed to Egypt s aid with pledges of deposits and investments. Its currency has slumped to record lows and is the worst performer in the world this quarter after Ghana s cedi.

The currency has weakened by less than 2% since the beginning of November, trading at 24.6 against the dollar on Thursday. Concerns about inflation, which is already at a near-five year high, and the impact on social stability in the country of 104 million people may be putting constraints on policy, analysts say.

In the months to come, traders of offshore derivatives see steep declines. The one month contract on the pound has slumped by 6% this month to 26.5 per dollar, while the 12 month contract fell to 30.9. The latter bet signals a 20% drop in the currency from the current level.

The central bank plans to remove a requirement for importers to have letters of credit to buy goods abroad is going to put further pressure on the currency. Egypt needs to clear a backlog of requests — estimated at over $5 billion — from importers and companies to access hard currency, a move seen to unleash a wave of selling in the pound.

Monica Malik, chief economist at Abu Dhabi Commercial Bank, said that US dollar liquidity is needed to help clear the backlog. If the delays continue, it raises market concerns over the flexibility of the FX regime and ability to repatriate funds. Gergely Urmossy, a London-based emerging-market strategist at Societete Generale SA, said he expects the pound to slump to 26 by the end of 2023, though there are risks to his forecast.

The CBE could find itself in a difficult position once again if the Central Bank of Egypt doesn't tighten and capital does not flow in line with the estimates of the authorities, according to Urmossy, the Central Bank of Egypt doesn't need to consider another round of large-scale devaluation.

None of the Viral List That Turned a Yale professor into an enemy of the Russian State.