Expectations of a decline in the Egyptian pound's immunity against the Corona virus

The Egyptian pound has made a rare rise in the currencies of emerging markets affected by the effects of the Corona virus, but the pressure is increasing for it to retreat.

Economists and bankers say that the country's foreign exchange reserves, which are already at their lowest levels in more than two years, will be subject to more pressure due to an expected drop in transfers from Egyptians working in the oil-rich Gulf states, the payment of debts, a collapse in tourism revenues, and a decline in prices Global gas.

Analysts said that the Central Bank of Egypt, like the monetary authorities in other emerging economies, has kept the pound steady in recent weeks by using some of its foreign exchange reserves, as the Corona virus pandemic is pushing investors to get rid of high-risk assets.

Economists say a possible financing agreement with the International Monetary Fund may increase pressure on the pound in the medium term.

The IMF's general view is that it is better to determine the value of currencies through markets, although the new director of the Fund, Kristalina Georgieva, says recently that flexible exchange rates may not always absorb the most favorable shocks for developing economies under stress.

The growing risks
and said Farouk Sousse Economic on the Middle East and North Africa at Goldman Sachs " has grown some adjustment risks in the near term," he said , adding that Egypt is expected to focus on maintaining the stability of the pound at the moment.

"We hear concerns that the new IMF program may require more flexibility for the pound in the medium term as well, but evidence indicates that the stability of the pound and a program from the IMF do not contradict."

The International Monetary Fund declined to comment, referring to a statement on Sunday confirming a request from Egypt and commending the authorities for the measures it had taken to address the repercussions of "Covid 19".

The Egyptian government press center did not respond to questions from Reuters, and only referred to a statement from Prime Minister Mostafa Madbouly on Sunday announcing that Egypt would seek assistance from the International Monetary Fund to continue to support the country in exceptional circumstances.

The central bank did not respond to requests from Reuters for comment.

The Egyptian pound has risen about 2% against the dollar this year, which is one of the few currencies of developing countries that have made gains, while the Mexican peso and the South African rand plunged 20%.

Bank of America analysts estimate that the Egyptian pound is more than its actual value against the dollar by about 15%. The currency has been moving within a very narrow range since mid-March.

"The massive intervention allowed the exchange rate to move like a currency peg with its stability basically at 15.75 pounds against the dollar," said Phoenix Calin of Societe Generale.

On the other hand, Egypt's foreign exchange reserves were damaged with a drop of 10% to forty billion dollars in March, according to official data, a rate of decline that economists say the country cannot afford to sustain.

Clouds
Among the emerging markets, Turkey is the only recorded the largest decline of foreign exchange reserves , in terms of percentage in March / March, according to data from the Institute of International Finance.

"The strategy of withdrawing reserves from currency management cannot continue ... it will lead to an overvaluation of the pound ... which indicates a depreciation in the medium term," said Kali Davis, economist at NBC African Economics.

In its statement on April 7, the Central Bank of Egypt said it withdrew from foreign reserves to partially cover the exit of foreign investment portfolios and to meet the needs of the domestic market in hard currency to import strategic goods, as well as to pay external debt service obligations.

Currency devaluation
The contraction of Egypt's foreign exchange reserves highlights the central bank’s predicament, as it seeks to prioritize price stability and living standards while facing sluggish growth. The International Monetary Fund estimates that the economy will grow only 2% in 2020, a sharp drop from 5.6% last year.

The exodus of investor flows has put pressure on foreign exchange reserves. According to data from the Ministry of Finance and the Central Bank, at least ten billion dollars were displaced from Egypt in March.

The last time that Cairo reached an agreement with the International Monetary Fund, in 2016, it agreed to allow the pound to float, causing its value to drop by 50%. In return, the government received a $ 12 billion loan.

During the turmoil that followed the overthrow of former President Hosni Mubarak in 2011, the central bank spent much of its foreign exchange reserves to support the pound, falling to a low of $ 13.42 billion in 2013.

The International Monetary Fund agreement cut energy subsidies and included the introduction of a value-added tax to help reduce the deficit, which has won praise from investors.

Madbouly said on Sunday, "The Egyptian economy has managed to withstand thanks to the measures taken by the state during the past four years, which is evident in the availability of goods and the non-shake of money markets."

But like other emerging markets, Egypt's bonds have been under pressure in the past few weeks. The cost of insuring its sovereign debt against default risks rose to well over six hundred basis points, the highest level since September 2013, according to IMS Market data.

According to JP Morgan calculations, Egypt also has to pay $ 1 billion in international bonds due on April 29, as well as $ 1.824 billion in interest payments on its foreign currency debt in 2020.

While dollar bond yields are traded at About 8% In the wake of the recent market downturn, the methods of international capital markets seem expensive for Egypt, as are many other emerging markets.

"If policymakers try to support the pound for a long time, this threatens to repeat the problems that led in 2016 to a 50% depreciation of the currency," said Jason Doom, chief economist for emerging markets at Capital Economics.

"Resorting to the International Monetary Fund means that the authorities will likely relax their hold on the pound sooner rather than later," he added.