The Egyptian pound has been gaining ground against the US dollar for more than a year now, and on Monday it was trading at LE15.5 per dollar, 13 per cent higher than in January 2019 and more than 40 piastres higher than at the beginning of the year.
The ongoing appreciation of the Egyptian pound stems from a combination of internal and external factors, according to economists.
Mahmoud Al-Gamal, an economics and statistics professor at the Houston-based Rice University in the US, told Al-Ahram Weekly that with high global liquidity chasing yield, the Egyptian pound had been consistently attractive for carry traders even as interest rates declined.
Carry trade is a trading strategy that involves borrowing at a low-interest rate and investing in an asset that provides a higher rate of return. Foreign borrowers at globally low interest rates are buying heavily in high-yield Egyptian treasuries and are thus helping to strengthen the Egyptian currency against the US dollar.
Foreign purchases in local debt instruments have jumped to $24 billion, almost double their size a year ago. Other sources of hard currency such as tourism and expatriate remittances are also on the rise.
The rising demand for Egyptian treasuries is also being fed by the fear of a trade war between the US and China, pushing investors to channel their money into emerging markets such as Egypt, according to Hassam Abdel-Ghani, an economics lecturer at Helwan University.
Improving the credit rating of the local economy as well as the positive outlooks given by the international financial institutions are making Egyptian treasuries even more appealing to investors.
A parallel increase in main foreign currency resources, mainly tourism and remittances, have also fed the dollar supply. Tourism revenues reached $12.6 billion in the fiscal year 2018-2019, as opposed to $3.5 billion in 2016, one year after the crash of a Russian airliner near Sharm El-Sheikh in Egypt. Following this event, Russia, a key source of tourism for Egypt, stopped all flights from and to Egyptian airports until a list of improvements in security measures was met.
Remittances from abroad jumped to $26.5 billion in 2019, putting Egypt in the fifth place among the largest recipients of expatriate remittances worldwide.
The government’s restrictions on imports also helped to increase Central Bank of Egypt (CBE) foreign-currency reserves and reduced demand for the US dollar, according to Ihab Al-Dessouki, head of the Economics Department at the Sadat Academy for Administrative Sciences.
Fears of the spread of the new coronavirus have also reduced Egypt’s imports from China.
“We are witnessing a state of de-USD-isation. Unlike the case after the floatation of the Egyptian pound in 2016, people are now less interested in buying US dollars because the exchange rate is going down,” Abdel-Ghani said.
Egypt is not currently having to make major debt repayments, and the global price of oil is declining, he added, making the country less in need of US dollars.
However, many economists still have concerns.
For Al-Gamal, the “Asian Flu” financial crisis in the late 1990s had showed how long stretches of capital inflows could be reversed very quickly as a result of external shocks. “The trigger may not have much to do with the economy itself. The crisis can start in a remote corner of the global economy, and the portfolio rebalancing of foreign investors can result in massive outflows from the country,” he said.
This makes the pound susceptible in the case of a sudden outflow of hot money, meaning that Egypt needs to secure sustainable sources of the dollar currency.
Al-Dessouki said that unless Egypt earns more US dollars through further exports and foreign direct investments, the US dollar might jump once again against the pound, especially once Ramadan starts later this year when Egypt imports more foreign goods.
But investors and investment bankers have not been able to agree on how the pound will move against the dollar until the end of the year.
Pharos Holding expects the dollar to settle at around LE16.25, with the possibility of it falling to LE15 if foreign-exchange inflows exceed expectations. Deutsche Bank said in a report earlier this month that it expected the dollar to fall to LE15.5 by June.
*A version of this article appears in print in the 27 February, 2020 edition of Al-Ahram Weekly under headline: Beating the greenback