The Egyptian central bank surprisingly devalued the pound by almost 13% and said it will adopt a “more flexible exchange rate” policy, steps that seek to ease a foreign-currency shortage hampering growth in the most populous Arab country. Stocks rallied.
The decisions will achieve “exchange-rate levels that reflect the strength and real value of the local currency in a short period of time,” the central bank, led by Governor Tarek Amer, said in a statement yesterday. The regulator earlier sold $198.1mn to local lenders at 8.85 pounds per dollar. That compares with a previous exchange rate of 7.73 pounds.
Shortly after the central bank’s statement, Egypt’s biggest lender that it will launch a financial product allowing foreign investors in local government debt to hedge their exposure to the currency. The moves may help boost foreign reserves, which have tumbled more than 50% since the 2011 uprising the ousted President Hosni Mubarak, before stabilizing at just over $16bn in the past six months. Policy makers aim to increase reserves to $25bn by the end of 2016, the central bank said.
“It’s a welcome, but long overdue shift in policy stance - Egypt could have saved billions in reserves if it had done this 18 months ago,” said Simon Williams, chief economist for central and eastern Europe, the Middle East and North Africa at HSBC Holdings. “The question now is will they follow through - if the Egyptian pound needs to weaken further, will they let it? Are the authorities really ready to tolerate the rise in inflation this will inevitably bring?”
The benchmark EGX 30 Index for stocks surged 6.8%, the most since July 2013, at 1.46pm in Cairo. Egypt’s Eurobonds maturing in 2025 rose for a third day, sending the yield down 16 basis points to 7.79. That’s the lowest in almost four months.
“Particularly from the bond side, this gets the devaluation issue out of the way, which had been hanging over our heads for a long time,” said Abdul Kadir Hussain, the chief executive officer of Mashreq Capital DIFC Ltd in Dubai, which manages about $1.5bn. The company sold its holdings in Egyptian dollar-denominated bonds last year. “Now that we have this, it could potentially open up Egypt for us again,” he said.
Yesterday’s decisions follow central bank steps to ease restrictions on foreign-currency deposits and withdrawals for companies and individuals, helping the pound strengthen on the black market against the dollar.
“Recent measures to improve foreign-exchange liquidity would have had limited impact and the critical issue is that the Egyptian pound needed to be weakened,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank. “This is a very positive move.”
Amer took the helm at the central bank in November amid a growing national debate focusing on the currency policy, with businessmen such as billionaire Naguib Sawiris urging a devaluation to reflect the dollar’s exchange rate on the black market. Policy makers were reluctant to weaken the pound, fearing a surge in consumer prices.
Inflation eased to 9.1% in February, the lowest level in six months. Still, the central bank will likely raise interest rates by 50 basis points, or half a percentage point, to 9.75% on March 17, according to median estimate of five economists surveyed by Bloomberg.
“There’s a possibility for even a larger hike,” said Mohamed Abu Basha, Cairo-based economist at investment bank EFG-Hermes, the country’s biggest.
He said the central bank’s move to a more flexible exchange-rate system “is extremely important because we’re not only pegging at a lower rate, we’re moving into a currency that will start to reflect market forces, so it’s more than just a devaluation.”