Egypt adopts more flex­i­ble ex­change rate af­ter de­val­u­a­tion

The Pak Banker - - COMPANIES/BOSS -

The Egyp­tian cen­tral bank sur­pris­ingly de­val­ued the pound by al­most 13 per­cent and said it will adopt a "more flex­i­ble ex­change rate" pol­icy, steps that seek to ease a for­eign-cur­rency short­age ham­per­ing growth in the most pop­u­lous Arab coun­try. Stocks ral­lied. The de­ci­sions will achieve "ex­change-rate lev­els that re­flect the strength and real value of the lo­cal cur­rency in a short pe­riod of time," the cen­tral bank, led by Gov­er­nor Tarek Amer, said in a state­ment on Mon­day. The reg­u­la­tor ear­lier sold $198.1 mil­lion to lo­cal lenders at 8.85 pounds per dol­lar. That com­pares with a pre­vi­ous ex­change rate of 7.73 pounds.

Shortly af­ter the cen­tral bank's state­ment, Egypt's big­gest len­der that it will launch a fi­nan­cial prod­uct al­low­ing for­eign in­vestors in lo­cal govern­ment debt to hedge their ex­po­sure to the cur­rency. The moves may help boost for­eign re­serves, which have tum­bled more than 50 per­cent since the 2011 up­ris­ing the ousted Pres­i­dent Hosni Mubarak, be­fore sta­bi­liz­ing at just over $16 bil­lion in the past six months. Pol­icy mak­ers aim to in­crease re­serves to $25 bil­lion by the end of 2016, the cen­tral bank said.

"It's a wel­come, but long over­due shift in pol­icy stance - Egypt could have saved bil­lions in re­serves if it had done this 18 months ago," said Si­mon Wil­liams, chief econ­o­mist for cen­tral and east­ern Europe, the Middle East and North Africa at HSBC Hold­ings Plc. "The ques­tion now is will they fol­low through - if the Egyp­tian pound needs to weaken fur­ther, will they let it? Are the au­thor­i­ties re­ally ready to tol­er­ate the rise in in­fla­tion this will inevitably bring?"

The bench­mark EGX 30 In­dex for stocks surged 6.8 per­cent, the most since July 2013, at 1:46 p.m. in Cairo. Egypt's Eu­robonds ma­tur­ing in 2025 rose for a third day, send­ing the yield down 16 ba­sis points to 7.79. That's the low­est in al­most four months.

"Par­tic­u­larly from the bond side, this gets the de­val­u­a­tion is­sue out of the way, which had been hang­ing over our heads for a long time," said Ab­dul Kadir Hus­sain, the chief ex­ec­u­tive of­fi­cer of Mashreq Cap­i­tal DIFC Ltd. in Dubai, which man­ages about $1.5 bil­lion. The com­pany sold its hold­ings in Egyp­tian dol­lar-de­nom­i­nated bonds last year. "Now that we have this, it could po­ten­tially open up Egypt for us again," he said.

Mon­day's de­ci­sions fol­low cen­tral bank steps to ease re­stric­tions on for­eign­cur­rency de­posits and with­drawals for com­pa­nies and in­di­vid­u­als, help­ing the pound strengthen on the black mar­ket against the dol­lar.

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