Egypt Devaluation Bets Are Back With Vote Near and War Next Door

Netty Ismail
·3 min read
1

(Bloomberg) -- Investors are ramping up bets that Egypt will allow its currency to fall sharply after elections in December.

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The derivatives market for Egyptian assets, used both to hedge risks and for speculation, is springing back to life as traders brace for the fourth devaluation since March 2022. Analysts at Deutsche Bank AG and Morgan Stanley expect the adjustment next quarter, while Societe Generale SA predicts it soon after votes are tallied in December.

“The market is positioning again for a devaluation,” said Gergely Urmossy, an emerging-markets strategist at SocGen in London. “The later authorities adjust the valuation of the currency, the more they’ll need to do. Time is certainly against them.”

President Abdel-Fattah El-Sisi — who is all but certain to win a third term in the vote on Dec. 10-12 — warned in June that the nation of 105 million can’t bear additional price hikes stemming from devaluations. But investors are betting it’s just a matter of time.

In the non-deliverable forwards market, the pound’s three-month contract has slumped 14% since early October to a record low of 37.7 Wednesday, signaling expectations of a steep devaluation early next year. The 12-month tenor has weakened 11% since late September to 47 on Wednesday, also a new low.

Expectations of another devaluation are also showing up in the London-listed securities of Egypt’s largest listed bank. Commercial International Bank’s depository receipts on the London Stock Exchange are trading at a 46% discount to their shares in Cairo — the most since 1997.

Although three devaluations since early last year have already slashed the pound’s value almost in half, it’s for months been mostly wedged between 30.8 and 30.9 against the dollar. By contrast, it declined to as weak as 48.5 this week on the local black market.

Adding to the negative outlook, hopes are fading that Egypt will quickly receive any meaningful financial assistance related to its role in supporting Palestinians fleeing Israel’s bombardment of the Gaza Strip. The Rafah crossing into Egypt is the only civilian gateway into Gaza not controlled by Israel, turning it into a critical entry point for relief supplies by land and the main escape route for refugees.

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While Egypt might get future regional and international support, the conflict on its doorstep also “brings notable domestic and external challenges,” Barclays Plc analysts including Brahim Razgallah said in a report. Those include disruptions to tourism and gas inflows, as well as the risk of street protests.

It’s not the first time in recent history that Egypt’s economy has been battered by the breakout of war elsewhere. More than $20 billion in hot money exited the country in a matter of weeks last year following Russia’s invasion of Ukraine.

Now, the cash-strapped country needs to loosen its grip on the pound to complete delayed reviews of its $3 billion rescue program from the International Monetary Fund. It’s in talks on boosting the program to over $5 billion, even though the Washington-based lender has yet to complete reviews initially scheduled for March and September.

Egypt has previously allowed several rounds of depreciation and pledged to move to a floating exchange rate. Its financing needs remain high at $24 billion in the fiscal year through June 2024 and its current-account deficit is set to almost double to 2.3% of gross domestic product, according to Morgan Stanley.

“Given pending IMF reviews and large external finance needs, we think that policymakers will likely allow another FX adjustment in 1Q24,” said Hande Kucuk, a London-based economist at the US bank. “Strengthening the IMF anchor would be key for Egypt’s macro stabilization post-elections.”

--With assistance from Mirette Magdy and Kerim Karakaya.

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