Egypt is likely to devalue its currency again in the “not-too-distant future,” and the pound may end the quarter 10% below current levels, Societe Generale said.
(Bloomberg) —
Egypt is likely to devalue its currency again in the “not-too-distant future,” and the pound may end the quarter 10% below current levels, Societe Generale said.
The debt-distressed North African nation will need a cheaper currency as both its current-account deficit and dollar shortage are sizable, strategists including Phoenix Kalen and Gergely Urmossy said in a report. Despite three devaluations that sent the pound 50% weaker over the past year, the currency hasn’t reached its “new short-term equilibrium,” they said.
“The lack of decisively hawkish action by the central bank of Egypt raises questions around the credibility of its commitment to deliver in accordance with its inflation-targeting mandate,” the strategists wrote. “Real interest rates remain negative both on a backward- and forward-looking basis.”
Egypt is in the throes of an economic crisis and the worst foreign-currency crunch in years. It has been locked out of capital markets and downgraded deeper into junk-borrower status amid surging food inflation following the pandemic and Russia’s war in Ukraine.
The country is working to unlock a $3 billion bailout from the IMF even as it faces an external financing gap of $17 billion
That’s put pressure on the pound, which was the fifth worst-performing currency in the world last year. Societe Generale strategists see it ending the current quarter at 34 per US dollar, from 30.62 on Friday. They didn’t specify whether the devaluation impact was included in their prediction.
When portfolio flows resume, the central bank will need to prioritize building back its foreign-exchange reserves and that will put additional pressure on the pound, they said.
“As a result, we stick to our USD/EGP forecast to express the heightened probability of another sharp devaluation in the near term.”
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