FOREX Africa: After Nigeria, Next Currency Devaluation May Be In Egypt

Written by Kevin Mwanza

Africa’s next currency devaluation might be in Egypt, the second largest economy on the continent, after Nigeria allowed the naira to weaken two weeks ago when it stopped fixing the local currency price to the dollar.

Egypt’s central bank governor Tarek Amer hinted earlier this week that the North African nation could be headed for another devaluation just a few months after he weakened it by 13 percent in March, Bloomberg reported.

Amer, who took office in November, has been talking up merits of a cheaper pound on several occasions even after his last devaluation of the exchange rate by the most in 13 years had little effect.

The country, which overtook South Africa as the second largest economy in Africa in May, has not fully recovered from effects of the 2011 Arab spring uprising. It has been faced with a dollar shortage that has stifled business activity and hit confidence in its economy.

The March devaluation failed to boost dollar liquidity or close the gap between the official and black market exchange rates, Fortune reported. The pound is trading in the parallel market at a discount of almost 20 percent to its official rate versus the dollar, according to Bloomberg surveys.

“We have two choices: either keep the pound stable or get factories working,” Amer told the Cairo-based daily Al-Mal, adding that the exchange rate should reflect market and economic forces.

“I will take what I think are the right decisions, in my view, and bear the responsibility.”

Economist have said another devaluation on the Egyptian pound is inevitable this fiscal year after the country’s foreign exchange reserves tumbled from $36 billion before the 2011 uprising to around $17.5 billion in May this year.

“I think that this is something that would have to happen to preserve the country’s FX resources that are currently declining as we have seen in the net foreign assets,” Hany Farahat, economist at CI Capital, told Fortune.

Amer said he expected reserves to climb back to $25 billion by year-end, but did not explain how that will happen.

At the Egyptian stocks have rallied 2.9 percent so far this week after the central bank governor was quoted by local dailies on Sunday saying that the policy of defending the local currency in the past five years was a “grave mistake,” and that currency depreciation would help boost Egyptian exports.

Egypt’s main stocks index has added 6.4 per cent since the last devaluation in March.

“(Investors are) taking the central bank governor’s comments to mean we’re on the verge of another round of devaluation, hence the rush into real estate and financial stocks, which stand to benefit the most,” Mohamed Ebeid, the head of brokerage at Cairo-based EFG-Hermes, told Bloomberg.