The Egyptian Pound (LE) is under severe pressure and will continue to drop in value after the postponement of the International Monetary Fund (IMF) $4.8 billion loan, a new report by investment bank EFG-Hermes says.
The deal was indefinitely postponed due to the ongoing political crisis and unrest in the country over the new draft constitution. The second round of the constitutional referendum is set to take place on Saturday.
In the past two weeks, the Egyptian pound lost some 1.5 per cent of its value versus the dollar, reaching LE6.15 to the dollar.
EFG-Hermes, the largest investment bank in Egypt and the Middle East, published a report Tuesday forecasting a larger depreciation to the pound by the end of 2013, to reach 6.6 instead of 6.4.
"We expect downward pressures on the Egyptian pound to continue in the first quarter of 2013 until an IMF deal is announced," reads the report.
"The announcement may ease these pressures but we continue to expect the Central Bank of Egypt (CBE) to allow for a gradual weakening of the pound on rising inflation and a weak fundamental balance of payments."
A severe devaluation will, automatically, lead to higher inflation rates as Egypt is a net food importer. "Inflation will rise next year no escape," Wael Ziyada, head of research at EFG-Hermes, told Ahram Online.
Hermes expects that a weaker pound in 2013 along with the government’s plan of fiscal consolidation through cutting subsidies would lead to acceleration of inflation rate.
The investment bank expects year-on-year inflation to accelerate from 5.7 per cent in the first half of 2013 to 8.5 per cent in the second half of the year.
A weaker pound will also increase the budget deficit expected at 10.9 per cent of GDP, pushing it to LE168 billion in 2012/2013.
EFG-Hermes forecasts it might rise to 11.7 per cent of GDP to LE202 billion.
The approval by the government to add an additional LE50 billion to the budget normally raises worries about a deficit increase.
Ziyada says he expects the IMF loan to be finalised in the second quarter of the coming year (April-June).
"If the IMF deal is not signed by that date and political turbulence continues, the pound might face a disorderly [sudden] devaluation but so far we believe a gradual devaluation is more probable," he told Ahram Online.
However, EFG Hermes does not believe that a disorderly devaluation is the certain outcome if the IMF loan falls through.
"It is hard to tell now, we need to see first which are the sectors that face problems at that time," Ziyada adds.
The IMF loan and other bilateral loans expected to be disclosed after the finalisation of the IMF agreement will not be enough to guaranty medium and long term stability for the pound.
"A sustainable policy capable of reducing the budget deficit, increasing production and foreign currencies flow is definitely needed," concluded Ziyada.