CLAPS Special: A flexible EGP & a 6% hike in interest rates: What this means and where will it take us?

What happened so far (in a nutshell):

The Central Bank of Egypt (CBE) shifted the EGP to a flexible exchange rate, causing it to lose more than 38% of its value so far. It also hiked interest rates by 6%.

• The overnight deposit and lending rates and the main operation rate of the Central Bank were raised by 600 basis points to 27.25%, 28.25%, and 27.75%, respectively. The discount rate was also raised by 600 basis points to 27.75%.

The aim behind those decisions is to address economic challenges that include:?

• Bringing interest rates higher than the inflation rate
• Combatting inflationary pressures, stabilizing or reducing the rate at which prices are increasing across the economy over time
• Eliminating the parallel exchange rate market

Before this move, Egypt received an influx of USD 35 billion from the Ras El Hekma deal, which contributed to the hard currency liquidity needed to pull it.

Right after the decision, in a press conference held today, Egypt's Prime Minister announced the long-awaited International Monetary Fund (IMF) deal, which has been sealed, expanding its rescue package to a substantial USD 8 billion. But that's not all— he also revealed an impressive additional sum of USD 12 billion, contributed jointly by the World Bank and the European Union.

What about my investments?

We sat with our friends at Rumble, Chief Technical Strategist Ahmed Elhefnawi and Chief Equity Strategist Amr Hussein Elalfy,? for insights on the news’ effect on different types of investments.

In general, however, they believe that further government policies and decisions will have the largest impact on the confidence levels of investors in Egypt’s economy. Until then, here are their takes:

• Gold is widely used as a hedge in times of uncertainty. This makes the gold price increase when uncertainty increases in the short and medium term. Ahmed Elhefnawi believes gold prices will continue to appreciate, in part due to continued hedging against uncertainty, and due to the global gold price trending upwards.
• Some real estate companies tend to borrow to find their projects, said Elalfy. The higher interest rates will increase their financing costs.
• Companies with foreign debt will also be impacted since their loans will be repaid at the new, more expensive exchange rate.

The pharmaceutical sector, Elalfy believes, will have more breathing room since the government may allow medicine prices to increase — something helpful for the price-sensitive industry.

What’s next

In the short term, the CBE anticipates the elimination of the parallel exchange rate market and a reduction in inflation rates.?

In the medium term, the CBE expects these actions to promote price stability, support sustainable economic growth, and create a favorable environment for private sector investment, despite potential risks such as regional tensions and global market fluctuations.