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Strong fluctuations of pound against the dollar over the upcoming period - Daily News Egypt

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Strong fluctuations of pound against the dollar over the upcoming period

The dollar's rate ranging between EGP 14 and EGP 15.5 achieves the required balance, further decline will not serve the state's interests, says Abdel Aal


Experts and foreign exchange officials in banks expect fluctuations of the Egyptian pound against the US dollar to continue over the upcoming period, excluding the possibility of the dollar staying stable at the levels it reached last week.

The Egyptian pound’s price witnessed an increase over the past three weeks, supported by the foreign currency supply in banks and a noticeable lull in demand.

Last week, the dollar reached EGP 15.72 for buying and EGP 15.85 for selling, compared to EGP 19.15 for buying and EGP 19.55 for selling at the highest level the dollar reached post flotation.

Mohamed Abdel Aal, member of the board of directors in one of the Arab and Egyptian banks and an expert on exchange markets (Photo Handout to DNE)
Mohamed Abdel Aal, member of the board of directors in one of the Arab and Egyptian banks and an expert on exchange markets
(Photo Handout to DNE)

Bank officials stressed that this decline will not be all there is; they expect the dollar to increase again until a state of stability is reached.

According to Mohamed Abdel Aal, member of the board of directors in one of the Arab and Egyptian banks and an expert on exchange markets, said that fluctuations of the pound against the dollar are expected, whether mild or severe.

He explained that after the liberalisation of the exchange rate, discussing the stability of the pound and other foreign currencies has become unreasonable and undesirable, because only the power of supply and demand can determine the price.

Abdel Aal told Daily News Egypt that the Egyptian pound will undergo three phases, with the first one being resilience as the dollar stabilises at the level between EGP 17.5 and EGP 20.5.

According to Abdel Aal, what the market witnessed over the past three weeks in terms of a great decline of the dollar price against the pound had several reasons.

One of the main reasons that the dollar declined was because of an inflow of foreign investments in governmental debt instruments. Another reason is the return of tourism. Besides, there was a psychological factor that prompted dollar holders to sell it to banks, in addition to announcing the increase of foreign reserves to more than $26bn by the end of January 2017.

Abdel Aal expected the pound to decline again against the dollar due to the possibility of an increased demand on the dollar by some clients who sold it earlier for EGP 19 and EGP 20.

“The existence of some exposed cash centres for companies may cause the dollar price to increase. These centres settling at a certain price level may lead to an increased demand on the dollar,” said Abdel Aal.

 

Tamer Youssef, head of the treasury sector at one of the foreign banks operating in the domestic market. (Photo Handout to DNE)
Tamer Youssef, head of the treasury sector at one of the foreign banks operating in the domestic market.
(Photo Handout to DNE)

Last week, the Central Bank of Egypt (CBE) reached agreements with investor associations to settle the situation of companies whose debt for banks are below $5m, while the situation of the rest of the companies is still vague.

According to Abdel Aal, the second phase of the development of the pound’s price extends from the second quarter to the end of the third quarter of the year. This is the phase where Egypt will receive another portion of the loans it agreed upon with international institutions, like the International Monetary Fund (IMF). During this phase, it is expected for the pound to reach EGP 15.5 or EGP 17.

He added that the third phase, which begins with the beginning of the last quarter, will be characterised by the stability of transfers made by workers abroad, and a growth in tourism incomes, as well as a relative stability of the other traditional sources. An increase of the pound’s value to reach EGP 14 and EGP 15.5 is expected during this phase.

Osama El-Menilawy, assistant general manager of treasury at a private bank operating in Egypt (Photo Handout to DNE)
Osama El-Menilawy, assistant general manager of treasury at a private bank operating in Egypt
(Photo Handout to DNE)

Abdel Aal stressed that this level of the pound’s price is the most suitable for the state’s conditions. It is the price that can achieve the required balance in the market, which encourages direct and indirect foreign investments. He added that this is considered attractive for tourism, supportive for export, and suitable for import.

“We expect EGP exchange rates to continue appreciating against the USD supported by weak demand and increase in the supply side , mainly from foreign indirect investment,” said Tamer Youssef, head of the treasury sector at one of the foreign banks operating in the domestic market.

Youssef added that “looking ahead for the remainder of the fiscal year (Q3-Q4:16/17), we expect the EGP will stabilise at the target zone of EGP 15.50 to EGP 16 for the following reasons. First, the negative current account deficit (CAD) trend is set to reverse during the remainder of the fiscal year (Q3-Q4:16/17), mainly supported by a recovery in tourism activity following the lift of travel bans by most source countries in late September and a rebound in private transfers through the banking system in the wake of the elimination of the parallel FX market.”

The demand for foreign currencies is at its lowest point, as people’s purchasing power declined and sales in most imported goods slowed down. With that, the demand for dollars to import more goods slowed down. Dollar inflows at banks have also increased as foreign indirect investors returned. Dollar remittances from Egyptian expatriates have risen as well.

According to Osama El-Menilawy, assistant general manager of treasury at a private bank operating in Egypt, the market’s mechanism is responsible for all the declines and increases in the dollar price. In other words, the mechanism of supply and demand is causing those fluctuations.

He explained that the state of turmoil in the market will continue until stable foreign exchange appears.

El-Menilawy pointed out that the dollar price will continue to change based on the seasonal demand, whether this demand was by individuals to cover for importing or the government to repay debts or the value of imports.

“If we accept non-intervention from the CBE to impact the market and accept the power of supply and demand, the change of the exchange rate will be unstable until it reaches a stable point that is decided by the purchasing and selling power which will not be affected by a seasonal demand as long as there is a continuous source of foreign exchange that economically stable countries depend on,” El Menilawy said.

To conclude, El-Menilawy said that the exchange rate will only reach stability when the state’s resources of foreign currencies are also stable. The results of flotation may last for almost a year, where the pound will range from EGP 16 and EGP 18 until the end of 2017.

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