LONDON: The Egyptian pound still looks overvalued even after this week’s devaluation and may need to fall another 10 percent to lure dollars back into the economy and restore competitiveness.
Monday’s 13 percent devaluation took the pound to 8.85 per dollar and was welcomed by bond and equity markets .
The move aimed to address dollar shortages that drove the pound to about 10 per dollar on the black market.
But before the devaluation the pound was the most overvalued of major emerging currencies in real effective exchange rate (REER) terms – measured against trade partners and adjusted for inflation – according to this graphic:
And even now, it remains well above its own 10-year average and is more expensive in REER terms than most currencies:
“The pound is nowhere near fair-value yet. It’s gone from being the most overvalued to one of the most overvalued emerging currencies in REER terms,” said Charles Robertson, global chief economist at Renaissance Capital.
RenCap analysis of the pound’s 20-year REER history suggests fair value around 10.5 per dollar in today’s money, Robertson said. But inflation and social unrest fears may limit further sharp moves, he added.
The pound’s black market rate is still around 9.6-9.8 per dollar, roughly where it trades in the six-month non-deliverable forwards (NDF) market :
But Egypt is running a budget deficit of over 10 percent of annual economic output and the central bank wants to replenish reserves to $25 billion from the current $16.5 billion.
A devaluation could help by luring tourists and investors, including the $18 billion that is estimated to sit in citizens’ dollar bank deposits.
Unofficial estimates of non-bank dollar savings are as high as $35 billion, Exotix economist said Alan Cameron said.
“The devaluation does take out a lot of the REER overvaluation of the pound,” Cameron said. “We are close enough that some of this money could come back.”
But Maarten-Jan Bakkum, investment strategist at NN Investment Partners says he remains underweight Egyptian equities, versus their weight in the MSCI index.
“I am not going to close the underweight because I think there is a lot of downside risk to the currency,” he said, adding that a further 10 percent depreciation was advisable over a year.
RenCap suggests he is right – its study of 13 devaluations showed equity investors made the best returns if they invested six months after an initial devaluation.
Currencies usually hit their lows only three months after the first move down, they said.