Egypt Seen Supporting Pound To Alleviate Devaluation Pressures

Egypt’s central bank is trying to support the Egyptian pound by indirectly raising interest rates and injecting dollars into the banking sector, in a move which bankers and economists say aims to decrease pressure for a devaluation they see as inevitable.

Egypt, which is heavily dependent on imports for food and other strategic goods, has been facing a currency crisis due to what many economists say is an over-valued pound. It allowed the currency to weaken gradually to 7.9301 pounds against the dollar in October, but that rate is still far from the 8.6 pound black market rate.

Imports have been lined up at ports in recent weeks as businesses have been unable to open letters of credit to release their products. But last week Egypt’s top two state banks, Banque Misr and the National Bank of Egypt (NBE), said they would provide dollars to cover import demands for businesses.

Many private bankers saw this as a central bank-inspired move to reduce pressure on the pound.

Then in a surprise move on Saturday, the same two banks also raised interest rates on Egyptian pound certificates to 12.5 percent from an average 10 percent, forcing other lenders to make the same move on Tuesday.

That ignited speculation that the central bank might soon hike official interest rates to defend the pound.

Central bank officials have not publicly clarified their intentions, increasing uncertainty in the markets and triggering a 0.5 percent fall of the Egyptian stock index over the last three trading days.

The situation may not become clear until a new central bank governor, Tarek Amer, takes over on November 27.

REDUCING PRESSURE
Meanwhile, some bankers are speculating that the central bank is simply reducing pressure on the pound so that when it eventually does engineer a devaluation, the extent of the move will not have to be that large.

“The central bank is preparing the scene for a movement on the pound. It is trying to lower the extent of the devaluation by supporting the pound to incentivize people to invest in the Egyptian pound,” one economist at a local bank told Reuters.

The central bank is expected to inject $4 billion into the banking sector in the coming weeks to meet foreign currency demands for imports, Mohamed El Sewedy, chairman of the Federation of Egyptian Industries, was quoted as saying in local media on Tuesday.

“On the one hand they (plan) to supply the market with dollars, and on the other hand they are lessening the liquidity of Egyptian pounds by raising interest rates at banks. This is done to decrease the depreciation pressures on the currency,” said Ziad Waleed, an economist at Beltone Financial.

While these tools could alleviate devaluation pressures in the short term, Waleed said they will not be sustainable as long as the country’s dollar resources are under pressure.

“These policies might work but they are not very sustainable. Several months from now there will be additional demand for dollars due to Egypt’s trade deficit so the central bank might have to repeat the same steps again or devalue the pound,” he said.

Egypt’s economy has been struggling since a popular uprising in 2011 drove foreign investors and tourists away, putting a strain on the country’s foreign reserves. Growing evidence that a bomb was behind last week’s crash of a Russian airliner may also undermine the currency by cutting tourism revenues.

Egypt’s foreign reserves tumbled from $36 billion in 2011, down to $16.4 billion in October, barely enough to cover three months worth of imports.

YIELDS BARELY CHANGED
Bankers had expected yields in government debt to rise after Banque Misr and the National Bank of Egypt raised the rate on their saving certificates to 12.5 percent, but yields were almost unchanged in the two auctions on Sunday and Monday.

In Sunday and Monday’s treasury bill and bond auctions, bankers at private banks said that while they bid higher in the auctions, state banks were bidding aggressively lower to keep the yields stable in order to keep the cost of government borrowing from rising.

Some bankers believe that the central bank had instructed the state banks to raise rates while keeping their bids low at government debt auctions in order to absorb liquidity of the Egyptian pound from the market without affecting government borrowing.

“The move is meant to absorb excess liquidity without hurting lending rates. This is positive because it provides some support of the local currency against the dollar without jeopardizing lending growth,” said Hany Farahat, Economist at CI Capital.

“It is a temporary move that does not rule out a devaluation, but rather complements it. The devaluation is inevitable and higher yields on the local currency would partially offset the devaluation impact, hence increasing the deposit rates,” he said.

Source : arabfinance