The recent decision by the Central Bank of Egypt (CBE) to adopt a flexible exchange rate has been remarked as credit positive for Egypt to remain stable at B3, Moody’s Investors Services stated on Thursday.
The US-based leading credit rating firm said the CBE’s devaluation of the Egyptian pound brings the official exchange rate closer to market rates and is likely to boost exports and foreign investment inflows.
On Wednesday, the Egyptian pound was strengthened by 0.07 to reach 8.78 against the US dollar at an exceptional auction held by the CBE, two days after depreciating it by 14.4 percent against the dollar from the previous rate of 7.73.
“These positive results should outweigh the near-term negative effect from devaluation-induced inflation,” Moody’s said on its website. “At the same time, devaluation will have a limited effect on the government’s debt stock or debt servicing costs owing to the low levels of foreign-currency-denominated debt.”
The flexible exchange rate, according to Moody’s, will help in easing the strains on Egypt’s “external liquidity position” and to improve the country’s export earnings, which have been suffering from “a decline in tourism and Suez Canal receipts, lower petroleum exports and weaker global demand.”
The CBE held three exceptional auctions to sell the greenback to local banks earlier this week, attempting to "eradicate" Egypt's currency black market, according to the bank’s governor Tarek Amer.
“The combination of improving external dynamics and a better growth outlook should reduce balance of payment pressures, which have resulted in Egypt’s net international reserves stagnating at around $16.5 billion,” Moody’s said.
Last month, Egypt lowered its economic growth forecast to a range of 4 to 4.25 percent for the current fiscal year ending on 30 June, down from 5 percent.