Economic reforms boost appetite for Egyptian pound

Foreign investors are heading back to Egypt after the government implemented a string of politically sensitive reforms, helping drive the weak Egyptian pound up more than 10 per cent against the dollar and easing a foreign currency crisis.

The pound has strengthened by about 14 per cent against the greenback since the beginning of the month, during which time Egypt sold more than a $1bn worth of treasuries to foreign investors. Cairo also issued a $4bn eurobond at the end of January that was three times subscribed, while the economy has been boosted by an increase in remittances from Egyptians working abroad.

“We are starting to turn a corner because now there is liquidity and the dollar is coming down,” said Mohamed Abu Basha, economist at EFG-Hermes, a regional investment bank. “Companies now say they are finding the dollars they need in the banks and some are holding off buying because the price will come down.”

The renewed investor appetite for Egypt follows the government’s decision to increase value added tax and slash energy subsidies to seal a $12bn International Monetary Fund package in November. Cairo also allowed the pound to float last year as it grappled with an economic slowdown and a severe foreign currency shortage.

The pound’s appreciation is good news for President Abdel Fattah al-Sisi as his government has been under pressure from an impoverished population reeling from soaring prices caused by the exchange rate move and austerity measures.

The dollar shortage had strangled the economy and gave rise to a thriving black market in the currency. For most of 2016, the central bank held the pound at a peg of E£8.8 to the greenback but buyers found it virtually impossible to source their needs at the official price. The currency lost more than half its value after the exchange rate move on November 3.

The challenge for the government is to follow up with reforms that further bolster confidence and attract direct investment in order to create jobs and improve declining living standards, analysts say.

“The mood among international investors toward Egyptian risk is currently very positive — the global environment is supportive and the market recognises the improvement in Egypt’s prospects since the IMF deal,” said a London-based economist. “But for now, the support is still short term. Egypt needs to prove it can follow through with reforms and rebalancing if the hot money in its local market is to turn into long-term financing.”

Radwa El-Swaify, head of research at Pharos Holding, an investment bank, said changing buying patterns, with Egyptians turning to cheaper, locally produced goods instead of imports, has also reduced demand for the dollar. At the same time, more dollars have fed into the banking system from people who had been holding on to their greenbacks.

Remittances from Egyptians working abroad also rose by 11.1 per cent to $4.6bn in the fourth quarter of 2016 according to the central bank.

“The hoarders have been offloading their dollars after they heard that foreigners are now entering the market,” Ms El-Swaify said. “One thing reassuring investors is that the IMF continues to monitor Egypt. Investors think there is huge potential but they are still testing the water.”