Egyptian pound’s rally to go into reverse – CE

The Egyptian pound has appreciated significantly since the devaluation in 2016 and there are signs that the strength of the currency is weighing on the country’s external competitiveness. Economists at Capital Economics forecast a gradual depreciation from around 15.6/$ now to 17/$ by the end of next year. But there is a risk that policymakers have not learned from their past mistakes and support an overvalued exchange rate for too long, leading to a sharper adjustment further down the line.

Pound to weaken over the coming years

“Our base case is that policymakers will allow the currency to weaken given the concerns about overvaluation and pressure from the IMF. The central bank is also likely to cut interest rates, which would support the recovery but reduce the pound’s attractiveness.”

“Our forecast is for the pound to weaken by 7% from its current level to 17/$ by the end of next year and fall further to 18/$ by the end of 2023, which is a larger fall than most analysts currently expect.”

“For one thing, Egypt’s heavy reliance on portfolio and other investment inflows to fund the current account deficit leaves the currency vulnerable to a tightening of external financing conditions. The currency could come under pressure in the event of a major deterioration in global risk appetite.”

“Policymakers at the CBE may not have learned from their past mistakes and will hold onto the pound for too long. And the longer that policymakers keep a tight grip on the currency, the more likely it is that Egypt’s external competitiveness will deteriorate, weighing on exports and sucking in imports. All else equal, this would cause the current account deficit to widen further and, eventually, a much sharper adjustment in the currency would be necessary.”