Egypt’s pound depreciation to grab foreign capital outflows, allows smoother IMF path: Goldman Sachs

Egypt’s move to depreciate its pound will arrest foreign-capital outflows and boost the nation’s chances of winning the next International Monetary Fund (IMF) loan, said Goldman Sachs Group Inc. on Monday.
The Egyptian pound was depreciated as much as 14 percent to 18.2323 against the U.S. dollar in the offshore market, its sharpest decline since a November 2016 devaluation that had helped to pull the North African country out of a dollar squeeze and turned it into a market darling.
The country grapples with surging inflation and external imbalances, both worsened by the Russian war in Ukraine.
The Central Bank of Egypt’s 100 basis-point rate hike, also announced Monday, turns the country’s real interest rate positive, said Goldman Sachs, while the pound’s depreciation eases concern it’s overvalued.
The decisions come amid foreign outflows of more than $15 billion from the local debt market in the past three weeks alone, according to Goldman estimates, and as Egypt holds talks with the IMF for various options including a precautionary and liquidity line of credit.
“It will help catalyze fresh inflows into the market as investors perceive a reduced risk of further devaluations, and even the possibility of some appreciation in the coming months,” Goldman Sachs economist Farouk Soussa wrote in a note.
“It also smooths the path for an IMF programme which we believe will help anchor confidence in Egypt’s fiscal and reform trajectory.” Soussa added.
The pound fell after policymakers had stressed “the importance of the exchange-rate flexibility to act as a shock absorber to preserve Egypt’s competitiveness.” Before Monday, the Egyptian currency had been steady in the 15.5-15.9 range since September 2020.
With high interest rates, a stable pound and a track record of market-friendly moves, Egypt had been a favourite of emerging-market investors for years, Goldman Sachs said. However, in the past few months, sentiment had deteriorated rapidly with growing energy prices and global monetary tightening hurting one of the Middle East’s most indebted nations.