CAIRO: The Egyptian pound has been weakening against the US dollar in the past weeks, reaching LE 5.6607 per dollar, following the euro’s continued decline.
Instability in European markets triggered by turbulence in Greece’s economy has led to the depreciation of the euro.
The Egyptian pound rose against the euro in recent months by 14 percent while the euro declined against the dollar, with rates ranging between 16 and 17 percent, according to an article in state-run daily Al-Ahram, citing a Central Bank of Egypt (CBE) report.
According to Al-Ahram, CBE Governor Forouk El-Okdah, told the prime minister in a recent meeting that the monetary and banking conditions in Egypt were stable.
In a market report earlier this week, Beltone Financials cited El-Okdah as saying that this stability stemmed from the CBE’s predictability of the European crisis and being conservative in the management of its foreign reserves.
The overall balance of payments registered a surplus of $3.1 billion in the nine months ending March, and capital flows recovered to their pre-crisis levels.
Tourism indicators are improving as are revenues from exports, workers remittances and the Suez Canal, Beltone cited the governor as saying.
Ola El-Khawaga, economics professor at Cairo University, said that this depreciation may be due to “several external and internal, indirect factors that affect the relationship between the currencies, including trade balances, the increasing value of the dollar against the euro and the deficit in the US economy.”
She added that Egypt’s ability to deal with the issue will depend on the flexibility of its exports, and the possibility of shifting towards US markets.
“Our exports to the US will now be more competitive as they will be cheaper to US consumers, specifically in the service sector,” said El-Khawaga.
“Suez Canal revenues in addition to workers remittances may be positively affected by the depreciation and may have a general positive affect on the economy as they contribute to foreign reserves,” she added.
Omneia Helmy, lead economist at the Egyptian Center for Economic Studies, previously told Daily News Egypt that the falling value of the euro to the US dollar is a cause for alarm.
“Since the EU is our main trade partner with regards to exports and imports, such change in their currency will affect our mutual trade,” she said. “Ultimately, our exports will be more expensive to European consumers and this will affect our competitiveness in EU markets,” said Helmy.
Helmy also expected this to cause a depreciation of the Egyptian pound relative to the dollar. She explained that this would cause imports from the US, specifically of wheat and agricultural products to be more expensive, which may cause inflation.
“Imports from the US will be more expensive for final and intermediate products as all our transactions are in US dollars,” she added.
According to the Economist Intelligence Unit (EIU) country report for June 2010, “in the second half of 2008 and early 2009, significant portfolio and other capital outflows and a strengthening of the US dollar led to some depreciation of the Egyptian pound, which fell to LE 5.63 to $1 in March 2009.”
However, since then “a strong interest rate differential and a robust economy compared with much of the rest of the world have attracted carry-trade inflows (as shown by strong net portfolio investment inflows in July-December 2009), causing the pound to appreciate steadily,” the report added.
It had anticipated this trend to continue until 2011, citing Suez Canal and tourism revenues as the main causes, but said that the recent events in Europe would limit or cancel out the positive affect of these factors.
“As a result of weakness in the euro zone, the pound will strengthen substantially against the euro, to an average of LE 6.98 to $1, which could harm exports to Europe and the tourism sector,” said the report.
“The trend should continue in 2010, but the pound is forecast to depreciate slightly in 2011, especially against the dollar. The pound will average LE 5.54 to $1 over the forecast period.
“Capital inflows will be more moderate than in recent years, but rising Suez Canal receipts and a revival of tourism will lift foreign-exchange reserves,” the report explained.
Although the pounds value is currently depreciating in relation to the dollar, Egypt’s net foreign reserves did rise to $35.1 billion at end-May, exceeding levels reached before the 2008 global economic crisis according to the recent CBE report.
According to the EIU report this could give the CBE the ability to intervene to prevent sharp swings in the exchange rate.
Beltone said it expects further weakening in the Egyptian pound versus the US dollar in the coming period, based on movements in the USD/Euro rate, as one of the main determinants of the EGP/USD rate.
"We expect, however, the pace of weakening to decelerate as the increased supply of foreign currency increases in Egypt in the summer months, given the moderate demand from the business sector," Beltone said.
"The firm said the EGP/USD rate could possibly slide to 5.70 – 5.75, depending on the duration and nature of the EU debt crisis, pulling back once international FX markets calm and the weakness in the euro caused by excess panic on investors’ part subsides and the increased supply materializes in the local market," the report concluded.
