By Mohamed Ahmed
The Central Bank of Egypt (CBE) is expected to make the difficult decision to devaluate the currency, according to a study by Pharos Investment Bank, but should simultaneously ensure restoring stability to the balance of payments over the medium term.
The study further said that in light of the current limited foreign exchange resources, the alternative option to manage the current minor recession is to ease demand for foreign currency, which would have disastrous repercussions on investor sentiment and companies’ capacities.
Accordingly, Pharos predicted that the market will gradually respond positively to the steps towards depreciating the currency, as soon as the state announces a concrete, transparent and credible plan to finance the deficit in the balance of payments for 2016.
The report explained that, based on the experiences of newly appointed CBE governor Tarek Amer, the CBE may allow for direct correspondence between the values of the pound and the dollar, in light of the limited resources.
Pharos cited Amer’s past experience to predict further, and faster, pound depreciation.
The report noted that during Amer’s tenure as deputy governor of the CBE, the pound depreciated between 2003 and 2004. The report also expected that managing the exchange price would depend on several elements, including depreciating the pound, and withdrawal of liquidity through open market operations that will increase interest rates.
These steps will come along with the activation of repurchase agreements (Repo), which may occur with the lifting of compulsory reserve rates on deposits in pounds, after it was cut to 10% from 14% following the 25 January Revolution.
The report further predicted that the CBE will cancel imposed restrictions, especially with regards to capping dollar deposits.
In light of these determinants, Pharos suggested that the stock market will witness increases of a number of stocks, such as those of EFG-Hermes, Madinat Nasr for Housing and Development, South Valley Cement, Oriental Weavers, and Alexandria Container & Cargo Handling.
Further, the report predicted that Ezz Steel will see a relative improvement in spite of their exposure to losses due to the exchange rate, since competition with Turkish and Ukranian iron is likely to calm.