Appreciation To Prove Temporary

BMI View: We expect the appreciation of the Egyptian pound following the foreign exchange auction to prove temporary and anticipate deprecation to resume in the coming months. Whilst current levels may be sustained for the time being, owing to greater foreign reserves , our expectation for inflation to remain elevated and for inflows to stay subdued will see the EGP7 . 0000 /US$ barrier broken in the coming weeks, before reaching EGP7.3 000/US$ by the end of 2013 .

The recent appreciation of the Egyptian pound against the US dollar will prove temporary and does not signal a reversal in the currency's fortunes. On September 4 the government launched an exceptional sale of US$1.3bn to finance strategic imports such as wheat, oil and essential industrial equipment with a cut- off price of EGP6. 8 9 52 /US$ . The currency has since strengthened to EGP6.90 5 5 /US$ on September 9 from EGP6. 9984 /US$ before the auction. We expect to see the EGP7.0000/US$ barrier broken in the coming weeks, before reaching EGP7.3000/US$ by the end of 2013.

The government is clearly optimistic about the prospects for the economy, and expect the new level to prove sustainable. This follows the decision by Egypt's Monetary Policy Committee to unexpectedly lower interest rates by 50 basis points in August to 10.25%, the first drop since 2009. However, we would caution against becoming optimistic at this stage, as in our view, the latest government move simply highlights the extent to which economic stability is now dependent on foreign aid inflows.

Temporary Drop
Egypt - Exchange Rate, EGP/US$

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This article is tagged to:
Sector: Country Risk
Geography: Egypt

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