Egypt reportedly ‘bought time to delay devaluation haunting market’

Citigroup Inc says ‘Egypt bought time to delay the local currency devaluation, haunting market’, reported Bloomberg.

Citigroup Inc. predicts Egypt will hold off on devaluing its currency until at least September as the prospect of bumper tourism revenue and sales of state assets ease the pressure on the economy, according to Bloomberg.

“We’ve reached a little bit of a peak pessimism when it comes to Egypt,” Luis Costa, the global head of emerging-market sovereign credit at the US bank, said in an interview.

The turnaround in sentiment follows signs that the government is stepping up efforts to sell or partially list state-held firms and an expected rebound in Egypt’s tourism industry to its pre-pandemic levels.

By easing the nation’s foreign-currency crunch and allaying investor concerns of a debt restructuring, the effort has prompted Citigroup to “establish a more positive view” of the Egyptian pound and dollar bonds in the short term, Costa said.

Derivatives traders have unwound bets that authorities would let the pound fall sharply again in the coming months after it lost half its value following a series of devaluations since March last year.

Any decision to weaken the currency will probably be made in September — when the International Monetary Fund is due to carry out a review of a $3 billion rescue program — or a month later during the IMF and World Bank annual meetings in the Moroccan city of Marrakesh, Costa said.

“This summer season can be an important short-term stabilizer until we start getting serious reviews again in September and October,” said Costa, who is also the head of strategy in central & eastern Europe, Middle East and Africa.

While the currency will likely remain “reasonably stable” in the next two months, Citigroup expects it to weaken to as much as 36 against the dollar by end-December and 37 next year, said the London-based strategist. It’s presently in a “neutral valuation range,” he said.

The pound’s three-month contract in the non-deliverable forwards market has risen almost 1% this month to 33.2 against the dollar on Thursday. It gained by 9% in May, its best month since February 2017.

In the spot market, the pound has been languishing around 30.9 since March.

Egypt needs to unlock more financing from abroad to clear a backlog of foreign-currency requests from importers and other companies. Billions of dollars in promised funding from Gulf Arab nations have yet to materialize.

The risk premium on Egypt’s distressed debt has narrowed about 350 basis points since reaching a record high of 1,486 over US Treasuries in mid-May, when the government struggled to regain access to external financing.

“A weaker Egyptian pound is not necessarily unlocking this extra availability of dollars on the domestic side,” Costa said. “That has to come from FDI deals.”

Egyptian officials have said the country won’t default on any obligations and it expects more state assets to be sold in the coming weeks.

Authorities have also been trying to improve the investment climate, including by making it easier for foreigners to set up shop, while working to boost private-sector participation.

“The government now has to focus on making a least a few deals come through and to give the markets the perception that the privatization program is, at least in the long term, at least 50% doable,” Costa said.