Egypt’s currency is expected to fall 9 per cent to a historic low in the coming year, according to a Reuters poll of economists, although some see a much bigger drop if the country’s economic and political woes trigger a balance of payments crisis.
The central bank has helped limit the pound’s fall to 4 per cent since the popular uprising in January 2011 that unseated Egypt’s president, sent foreign investors and tourists fleeing, sparked labor unrest and severely disrupted business.
But it has done so by eating into foreign currency reserves, which now stand at $15.53 billion, less than three months’ worth of imports, level seen as risky by many economists.
More worryingly, cash and government securities, the most liquid portion of foreign reserves, have fallen to $7.8 billion, according to one Western economist.
With local banks shouldering almost the entire burden of new lending to the government, state borrowing costs reached their highest in well over a decade in late June.
A big test may come later this year when the first of the one-year dollar-denominated T-bills the government started issuing last year to shore up its reserves begin maturing.
It will have to repay or roll over more than $4.25 billion of these bills from 30 November to 22 February.
President Mohamed Morsi, sworn into office 12 days ago, will be hoping that, by then, the economy has improved and foreign donor funds have arrived.
But much of that international help will be tied to economic reforms that are hard to impose on a long-suffering population.
Donors such as the International Monetary Fund want to see more clarity on economic policy, but there are unresolved tensions between Morsi’s Islamist bloc and the army which could complicate efforts to secure foreign help.
“Anything could happen, but in our central scenario we still expect some form of devaluation to happen,” according to Said Hirsh at Capital Economics. “In this case it is a gradual depreciation, perhaps over a two or three steps, until then.”
That kind of devaluation would keep the currency within the central bank’s comfort zone, he said, and would not provoke significant inflationary pressures.
“However, there is still a risk that things could get nasty and a disorderly devaluation takes place. Under this scenario - which is not our central one at the moment - there will be a much bigger drop in the value of the pound.”
The median forecast from 10 economists who contributed to a Reuters survey conducted 2-12 July showed the pound likely to stand at around 6.60 to the U.S. dollar by mid-2013, compared to 6.061 reached this week, which was the currency’s weakest since early 2005.
Hirsh at Capital Economics gave a forecast of 6.50.
The pound’s previous weak point was 6.26, reached in 2004 during Egypt’s most recent balance of payments crisis.
The political confrontation between president and military risks paralysing the government and further eroding confidence. Mursi must convince the IMF that he has enough control of government and broad political support to implement austerity measures to open the way for a loan facility, last put at $3.2 billion.
The risk of another currency rout has kept foreign investors on the sidelines because even with short-term government debt yielding almost 16 per cent, a slide in the pound could wipe out their returns.
Economists polled expect the economy to grow by 3 per cent in the fiscal year to 30 June, 2013, faster than the around 2 per cent expected at best for 2011/12 but around half the level in the years before the uprising.
That was itself barely enough to find work for the large number of youngsters entering the job market.
With the economists forecasting inflation of 8.5 per cent this fiscal year on average and the new president unable to offer big subsidy and wage increases to assuage a frustrated population, the potential for more instability appears high.