Egypt's pound devaluation has not reached an end

Marwa Hussein, Wednesday 30 Jan 2013

Egypt's currency weakened further this week with experts predicting sharper slips ahead

A man walks next to a currency exchange office in downtown Cairo, Egypt (Photo: AP)

The Egyptian pound slipped further against the dollar at the Central Bank of Egypt's (CBE) $50 million currency auction for local banks on Tuesday. 

On Wednesday, the official exchange rate reached 6.7 pounds per dollar. At this price, the pound has lost 7.5 per cent of its value against the dollar since the Central Bank began hold currency auctions at the end of December. 
Further devaluation is likely in the coming weeks and months, according to analysts. But how far will the pound dip? 
Experts estimate that the dollar will reach LE7.5 this year, but their forecast might be modified according to the political situation. 
"If no changes occur on the political scene, I expect the dollar to reach LE7.5 officially this year. The black market will overpass it by 10 per cent, but those expectations can change at anytime," says Wael Ziada, head of research at Mideast investment bank EFG-Hermes.
The dollar has already exceeded LE7.15 in the black market.
Due to instability in the political situation in the country, Ziada believes it is hard to forecast future exchange rates. Uncertainty alone drives down confidence.
"The political situation cannot be measured on a scale and its effect on the currency are never evident. The revolution remains the biggest political event during the past two years; however, the pound lost only 2-3 per cent during the months that followed January 2011," Ziada recalls.
"Two months ago, who knew that Qatar would grant us $2.5 billion? No one can pretend to know exactly how far the dollar will go. We can forecast only directions."
Ziada believes that the opacity of the exchange rate situation is a major problem and a main reason why investors do not come to Egypt.
“Nobody can pretend to know where the dollar will rest,” he concludes. 
The latest wave of violence and deadly clashes this week may cause a further postponement of Egypt-IMF talks on an agreement over a $4.8 billion loan. 
The violence has also affected tourism, with many companies reporting group tour cancellations.
Hani Guenena, head of research in Pharos Investment Bank, expects the dollar to reach LE7.5 or even LE8 in the period ahead.  
“Production costs in Egypt will never be the same; energy prices as well as labour costs will increase. From another side, foreign currencies that will come to Egypt will not be used to support the exchange rate but to increase foreign reserves,” Guenena explains. 
“If nothing happens to activate the economy and bring foreign currencies to the country, whether the IMF loan or the sukuk (Islamic bonds) law, Egypt might enter in a recession, demand will significantly decrease and people will not have money to convert to dollars," warns Guenena. Though the pound devaluation would stop, economic fundamentals would greatly suffer.
The CBE offered $50 million at a currency auction Tuesday for local banks able to bid for as much as $7 million each. Tuesday’s auction was the 15th such sale. 
The CBE introduced the new auction system at the end of December for buying and selling US dollars to help conserve foreign reserves, which it says have reached critical levels.
The currency slip was accompanied by a rush by investors and ordinary citizens to switch their Egyptian pounds to foreign currency amid fears of a further devaluation.
Short link: