Three years after flotation of EGP, dollar expected to witness downward spiral in 2020: Experts

Doaa A.Moneim , Sunday 3 Nov 2019

Egypt’s improved economic performance is the main reason behind the decline of the US dollar against the Egyptian pound, say banking experts

File photo: An employee counts U.S. dollar bills at a money exchange office in central Cairo, Egypt, March 20, 2019. (Photo: Reuters)

Egypt floated the domestic currency in November 2016, making its price subject to the global market's rules of supply and demand.

Throughout the past three years, the US dollar price in the Egyptian banking system has fluctuated, in the country's second experience of liberalising the Egyptian pound since the implementation of the privatisation programme in the nineties.

Egypt implemented its economic reform programme within the framework of its agreement with the International Monetary Fund to receive a $12 billion loan. 

Now that the pound is showing a better performance against the dollar, can that be attributed to the country's economic reform programme? And, more importantly, will the dollar price fluctuate against the pound again?

According to data released by the Central Bank of Egypt (CBE), the US dollar was sold for EGP 17.5 and bought for EGP 18 in the last three years. These prices remained more or less the same, with the exception of the period from December 2016 to February 2017 when the dollar was sold for EGP 18. At some point during that period, the dollar was sold for EGP 19.15 and bought for EGP 19.56, before declining two days later to record EGP 18.83 for selling and EGP 19.29 for buying.

From 9 to 13 February 2017, the US dollar prices fell to EGP 17.22 for selling and EGP 17.35 for buying, and continued a downward trend until 1 March 2017, when it began a gradual surge to record its highest on 3 April 2017 with EGP 18 for selling and EGP 18.1 for buying.

The dollar stabilised for two years, ranging between EGP 17-18, until its price decreased in May 2019, recording EGP 16.9 for selling and EGP 17.1 for buying.

The downward trend continued from then on. On 29 October, the dollar was sold for EGP 16 and bought for EGP 16.1.

Bloomberg announced in July that the Egyptian pound was the second best performing currency in 2019 in its report on the performance of currencies.

The Egyptian pound's exchange rate rose on the dollar by 6.5 percent in the first six months of 2019, while the Russian ruble, the top performing currency according to the Bloomberg report, marked a 9.5 percent uptick.

In October, the US dollar prices lost 14 piastres, or EGP 1.8 since the beginning of 2019, as the dollar continued its decline against the pound, reaching EGP 16.08 for buying and EGP 16.18 for selling, marking its lowest level since March 2017.

The CBE’s data reflects how the Egyptian pound had struggled since its flotation, and how the national currency began to respond to the variables that the Egyptian economy had witnessed in line with the economic reform programme.

In its forecast of dollar prices against the pound, in light of the current performance, the online platform Trading Economics anticipated that the prices are expected to go up slightly to trade at EGP 16.27 by the end of this quarter, estimating it to trade at EGP 16.38 in 12 months’ time.

Financial and banking expert Hani Abul-Fotouh told Ahram Online that the dollar price declined by EGP 1.53, particularly since December 2018, marking a 9-10 percent downward spiral. He added that it was the largest decline since the Egyptian government had adopted the economic reform policy and floated the pound three years ago.

“Such drop was mainly driven by the CBE's decree that halted foreign investors' transactions, and instead allowed dollar trading through the Egyptian banking system 'Interbank' which led to the increase in foreign currency flows and provided dollar liquidity,” said Abul-Fotouh.

He added that the Interbank system aimed to provide hard currency for foreign investors to encourage them to invest in the stock market and domestic debt tools through purchasing treasury bills and bonds that supported the investment climate in Egypt and made it more attractive for investments, thereby increasing the availability of the dollar.

The notable upgrade in tourism and non-petroleum exports, the increase in financial transactions, in addition to the improvement of Egypt’s credit rating have led to the decline in the price of the dollar against the pound, Abul-Fotouh said.

He anticipated that the price of the dollar against the pound would hover around EGP 15-16, if the flows of foreign currencies through tourism or foreign direct investments increase. 

Meanwhile, banking expert and former vice chairman of Banque Misr, Sahar El-Damati told Ahram Online that Egypt’s economy had witnessed notable improvements that led to the upgrade in the price of the pound against the dollar.

El-Damati explained the decline in the price of the dollar against the pound was driven by improvements in the tourism and non-petroleum exports performance, the increasing revenues from the Suez Canal -- despite the global trade exchange slowdown -- and the operation of the Zohr natural gas field, that would enable Egypt to export gas to foreign markets by 2020 with a total of $2 billion per year.

She added that the significant demand of foreign investors on Egypt’s treasury bonds and the increase in foreign direct investment flows to Egypt’s market also contributed to the notable decline in the US dollar prices against the Egyptian pound recently, together with the establishment of new cities and mega projects that serve to support real-estate exports.

El-Damati expected that dollar prices would fix at EGP 16 by the end of 2019 and the beginning of 2020 if the recent improvements in the Egyptian economy continued.

The head of equity research at Pharos Holding for Financial Investments Radwa El-Swaify told Ahram Online that the Egyptian market had witnessed an abundance of the US dollar in line with the better performance of tourism and exports, in addition to the notable demand of foreign investors to purchase treasury bonds, as a tool of fixed returns, and the significant increase of remittances of Egyptian expatriates.

“In the past three years, foreign investments in treasury bonds have recorded $17 billion, tourism sector revenues have increased to $13 billion from $4 billion, and Egyptian expatriates' remittances have risen to $26 billion from $8 billion. Therefore, the dollar become more available and the pound performed better," said El-Swaify.

She added that the pressure on the dollar had decreased, but it was a slight decline which could not be among the reasons behind the better performance of the pound.

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