EFG-Hermes, a Cairo-based investment bank, noted to investors last week that it expects the Egyptian pound to fall to LE 5.70 by the end of 2009 and LE 5.90 by the end of June 2010 relative to the U.S. dollar. The pound has strengthened by 2.2% against the dollar since March, hurting exports and in-turn stalling GDP growth–which is set to fall to 3.1% in 2009-2010 from 4.1% in the year prior, the firm posited. “With credit growth slow and low loan-to-deposit ratios, exchange rates are a more effective channel than bank lending for supporting growth, by improving export competitiveness. The Nominal Effective Exchange Rate (NEER) has been stable since June, but we think that the [Central Bank of Egypt (CBE)] will encourage some trade-weighted EGP depreciation before the end of 2009,” speculated EFG economist Simon Kitchen to investors. Yet while Kitchen’s theory makes sound economic sense, it may not pass muster with authorities. One risk of currency devaluation is that by increasing the price of imports and stimulating greater demand for domestic products, devaluation can lead to inflation, which in turn might require the CBE to raise interest rates–a prospect most central banks will balk at until a bona fide global recovery is indeed upon us. Moreover, inflationary pressures could wreak havoc with habitually volatile food prices that will already be tied to increased and impending consumption and preparations for post-Ramadan festivities.

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