In a report issued Sunday morning, investment bank Beltone Financial predicted Egypt’s Central Bank would weaken the Egyptian pound to between LE11.5 and LE12.5 to the dollar tomorrow or the following day, diminishing it by as much as 40 percent of its current official value (LE8.88 per dollar).
This is Beltone’s third floatation alert this week, after President Abdel Fattah al-Sisi met with the head of the Central Bank, Tarek Amer, on Friday, which the investment bank interpreted as the “final political endorsement” for floating the local currency.
If Beltone’s predictions are right, the first step would be for the Central Bank of Egypt to hold an exceptional FX auction on Monday or Tuesday, during which it would weaken the pound in an initial managed floatation that is likely to last two to three weeks before a full-fledged floatation, the Beltone says in its report.
The report, titled: “Final alert: Floatation within hours,” predicts that the auction, which will be financed by Egypt’s foreign reserves, will be accompanied by a statement from the Central Bank indicating that Egypt will move to a more flexible exchange rate system.
End of October reserve figures will not be published until November 6 or 7, so the Cental Bank will be able to use reserves relatively freely starting next week without having to publish its figures, Beltone claims.
The World Bank is then likely to approve Egypt’s US$12 billion loan in the week following these changes, between October 4 and 9, in what Beltone’s report terms, “the first shock to currency speculators.”
On October 5, the Central Bank is due to publish September’s reserve figures, which Beltone expects will reach $18.5 billion, compared to $16.6 billion at the end of August. “The increase is mainly supported by UAE and World Bank deposits. This should act as the second shock to speculators, particularly households that started to dollarize over the past few weeks,” the report adds.
There is likely to be a second attack on the parallel currency market between October 9 and November 17, according to Beltone. In this case, the National Bank of Egypt and Banque Misr will coordinate to raise benefits on Egyptian pound investment certificates, which would be followed by an emergency meeting of the Monetary Policy Committee, on November 17, to raise the appeal of the local currency and limit inflation.
Parallel to this, between mid-October and the first week of November, Egypt will secure US$3 to 5 billion from the Eurobond market, in addition to $2 billion from Saudi Arabia, and potentially another $1 or $2 billion through a currency swap with China, the report states. If Egypt goes for a fully-fledged float this week, the World Bank will expedite the disbursement of the first installment of the loan, to the value of $4 billion.
By November 6, the Central Bank will announce the value of dollar reserves, as of the end of October, which the report expects will jump to between $25 and 35 billion, “depending on the magnitude/timing of inflows and magnitude of ‘volatility containment operations’ during October.”
Parallel and official market rates are expected to converge to around 10 percent, and the official rate will stabilize at around LE12 per dollar between mid-November and the end of December.
Beltone’s projected timeline is “optimal to ensure success in securing funding from the IMF and Eurobond market, as well as meet the President’s pledge to stabilize the FX market by December 2016,” its statement asserts.
Sisi recently requested that the head of the Central Bank, Tarek Amer, continue to lower national debt and increase monetary reserves, stressing the importance of ensuring that low-income sectors are not affected by monetary reforms, and promising he would ensure basic goods maintain their price, regardless of fluctuations in exchange rates.
Beltone’s projection corresponds with a similar report issued by Capital Economics research consultancy firm in mid September, which anticipated further devaluation of the pound versus the dollar, to reach LE12 per dollar by the end of 2017, and until the nation’s Gross Domestic Product (GDP) reaches 2 percent next year.