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Egypt may extend gains on pound’s float, Gulf may be hit by weak oil
Egypt’s blue chip equities index may extend some gains on Sunday following the float of its currency at the end of last week, but Gulf markets are likely to pull back after crude oil suffered its biggest weekly percentage decline since January.
After floating the Egyptian pound, initially devaluing it by about a third from the peg of 8.8 to the U.S dollar, the central bank let it drift down to around 15.35-15.75 on Thursday.
Many Egyptians expect the pound to fall further on Sunday when banks begin trading it freely.
On Thursday the Egypt’s blue chip index jumped 3.4 percent after the central bank floated the currency, though it finished well off its intra-day high, as some traders cashed out, wasiting to see how the pound performs this week.
And gains in the stock market on Sunday may be limited as investors will most likely remain wary of aggressively allocating funds until the pound stabilises.
Also, global investors are risk averse ahead of Tuesday’s U.S. election, keeping many foreign funds on the sidelines.
In the Gulf, oil-sensitive shares are likely to be hit after Brent futures fell to $45.58 a barrel, their lowest levels since Aug. 11 as signs of tensions resurfaced between Saudi Arabia and Iran that could scupper a key supply cut pact.
No quick portfolio inflows due to Egypt devaluation, fund managers say
Egypt’s currency devaluation may eventually bring foreign money into the country, but fund managers say uncertainty about the economy means there will be no quick inflows of portfolio investment from abroad.
To ensure its currency stabilises after last week’s devaluation, Egypt needs a surge of hard currency receipts to cover a current account deficit that totalled $18.7 billion in the year to last June.
Foreign direct investment, at $6.8 billion, is expected to change only slowly because companies’ decisions are complex. Egypt’s economy is so import-dependent that an export boom looks unlikely any time soon.
A cheaper Egyptian pound may encourage more Egyptians working overseas to send money home, but remittances – which totalled $17.1 billion – have changed little over the years.
That leaves foreign portfolio investment as one of the best potential sources of new money. Before political upheaval in 2011 led to years of economic instability, Egypt attracted billions of dollars of such investment annually; last fiscal year, there was a net outflow of $1.3 billion.
But many foreign fund managers said that while the currency shift was positive because it largely removed a massive overvaluation of the pound, other types of risk would continue deterring investment.
Although foreign funds purchased Egypt’s dollar bonds at the end of last week, there was little sign of foreign buying of local currency assets.
For that to happen, several managers said, Cairo will have to show it can replicate the success of other countries in International Monetary Fund lending programmes, such as Pakistan – a process that could take money months.
The devaluation “definitely makes it more attractive as the pound is now no longer such a risk,” said Allianz Global Investors portfolio manager Shahzad Hasan.
“But at this level the good news is priced in on the (dollar) bonds. Now the focus switches to the implementation of the IMF programme, which is more difficult.”
The devaluation took the pound from 8.8 against the dollar to around 15.35-15.75.
Many foreign investors will be unwilling to put money in local currency assets until they think the pound has found a floor, and that point may be distant. Non-deliverable forward contracts price the pound at 17 per dollar in 12 months.
That is partly because of a backlog of demand for dollars. Analysts at Citi estimate this at $9-11 billion, and say it must be cleared before the pound steadies.
Another risk is inflation. Although imports of most goods were already being paid for at the black market exchange rate, the devaluation will raise prices for imported fuel and possibly essential foods. Citi estimates this will add 3 percentage points to its projected year-end inflation rate of 14 percent inflation, and a further 1 or 2 points early next year.
Citi said that while Egyptian Treasury bills with yields around 22 percent looked “optically interesting”, interest rate increases of another 2 or 3 percentage points could be needed to stabilise inflation.
Another problem is the stock market, with a capitalisation of under $30 billion, has become too small to absorb much new money.
The market in local currency government bonds and T-bills, which totals about 1.40 trillion pounds, is much bigger.
Foreign participation in local bonds is virtually nil but a few years ago it was as much as $10 billion, said Renaissance Capital, which expects foreigners to return over the next six to 12 months.
But there are logistical difficulties. “From a practical perspective, it’s still difficult to deploy capital into Egypt,” said Kieran Curtis, portfolio manager at Standard Life Investments.
Custodian banks are cautious in offering services, because the Cairo bourse closed during political unrest, he noted.
“We have been involved in the hard currency bonds, and at some point we will look at the T-bills.”
Egyptians prepare for further fall in floating pound
Many Egyptians expect the pound to fall further on Sunday when banks begin trading it freely after the country ditched its U.S. dollar peg last week in a bid to end a flourishing black market.
Banks have been open in Egypt over the Friday to Saturday weekend, but interbank trading will only begin again on Sunday at 10 a.m. (0800 GMT) in what is expected to be the first trading session without guidance from the central bank.
Some business executives said the government was betting it could finalise a $12 billion, three-year loan from the International Monetary Fund in coming weeks, and bolster confidence by using the first disbursement to provide foreign currency liquidity.
In the meantime, businesses are braced for more volatility, with many predicting the pound will weaken further because of pent-up hard currency demand.
Bassem Hussein, a manager at family-run Interfood, an importer and processor of coffee and spices, said he had not tried to buy dollars since Thursday and was waiting to see where the market settled.
“I can’t make any prediction… Everyone is holding back…and a lot more decisions are likely to come from the government this week.”
Several businessmen, including an executive at a multinational, said they thought that if the pound plunged on Sunday, companies would hold back from buying dollars to help the new exchange rate system work and avoid steering profits to the black market, which many want to see put out of business.
After floating the pound, initially devaluing it by about a third from the peg of 8.8, the central bank let it drift down to around 15.35-15.75 on Thursday.
The float ended strict rationing of dollar supplies at banks and dealt a blow to a booming dollar black market under the peg.
“I expect the rate to go very high…I expect it to exceed 17, 18,” said one commodity trader who, before the float, financed imports through the black market.
“Demand for dollars will be high. Maybe it will stabilise in the long run, but for sure I’m expecting the rate to jump.”
At the end of last week, non-deliverable forwards priced the pound at 15.95 in three months time and 17.10 in 12 months.
BLACK MARKET ON HOLD
Some Egyptian bankers were disappointed on Thursday that the central bank had not flooded the system with hard currency to help stabilise the pound, saying the black market would return if banks proved unable to meet the demand backlog.
“They can get around the non-intervention policy by indirectly injecting into the market through the state’s banking arms, National Bank of Egypt, Banque Misr and Banque Du Caire,” one capital market professional told Reuters.
Black market traders said they were waiting to see what would happen, with some set to hold a Saturday night crisis meeting in Cairo, one said.
“Prices are very stable at the moment. If the banks tomorrow don’t start selling dollars, the black market will start selling at 17.5 and 18.
“I am not buying dollars at all at the moment… Everyone in the black market is doing the same… because anything they do right now is a gamble. Tension is very high.”