An Overnight Devaluation in Cairo!!

At the early morning in Cairo, the CBE announced an anticipated increase in the interest rates by 100 basis points (1%), whereas and what was not considered in full, is the overnight relative devaluation for the EGP against all currencies.

Welcome back in our "Flash" newsletter to cover the most updates about currency and interest rates, coming to you from Cairo, Egypt.

The decision related to the interest rates was anticipated easily, especially, in the light of the increase approved in few days back by the "Federal Reserve Board of Governors" in USA, where these rates are the most determinant for the interest trade market in Egypt and other markets too in Argentina and Brazil (i.e. the developing markets).

While, at the same time, nearly all banks announced in the early morning of today March, 21st, 2022, "the new exchange rates for EGP"!

Obviously, the decision need no further official decree to float (liberate) the EGP again, as the decree issued previously on November, 3rd, 2016 for liberating the EGP against all currencies was enough, where, the CBE can, according to the same decree, "adjust" the EGP levels at any time according to market mechanics. Especially, in the light of the slight appearance of the parallel market and the raise of two rates for the US$ again, the matter which wouldn't be tolerable by the government.

"Is it minor adjustment let's say?"

Fortunately, its a 10.8% move, mainly against the US$, while, still a very crucial question, what would be the percussions for this increase?

I approached two of my clients working heavily in importing commodities, one of them said, "I lost 0.43 EGP for each one US$ in 5 minutes, ........ this morning I asked my bank to save dollars for my new shipment, the bank replied, they can save dollars at EGP 17.03 for one US$, my friend shacked his head and get back after only 5 minutes after digesting this, the bank replied it's now EGP 17,47".

Other client is now on extreme rage, "...... I have to pay my suppliers in more EGPs!!!"

The biggest problem is the timing, the international inflation in prices, especially for food and oil since the Russian/Ukrainian crises and adding to this, the Holy month of Ramadan, the prices in Egypt are anticipated to sky-rocketing unfortunately.

"What about the US$ reserve?" Any red lines crossed?"

It's in the plateau of US$ 44 Bn. according to last announcement by the CBE, and this can save Egypt's imports for 3-4 months.

"What about the exports?, are we appealing enough now?"

The exports are sloping upwards by CAGR of 15.1% for the years of 2011/2012 until 2020/2021, the devaluation would boast this rate for sure, by making our exports more appealing in the markets.

"What about the Tourism?"

The slight devaluation will boast the tourism numbers as well, which slopped downwards in 2020/2021 to US$ 4.9 Bn., due to the COVID situation, coupled with the Russian/Ukrainian crises in 2022, where the Russian and Ukrainian tourisms are constituting a crucial part of the marine tourism. Historically, the Tourism revenue was peaked again in 2018/2019 to normal plateau before 2011 upheaval to reach US$ 12.6 Bn.

In a swift response of the biggest national banks in Egypt, (National Bank of Egypt and Misr Bank), to the devaluation, a new product CD for ONLY one year, with 18% interest rates was issued this morning. For two main reasons:

• Will adsorb the majority of liquidity in EGP in the market, so the purchasing power of the crowd would be curbed, accordingly, no extensive or un-needed utilization of the US$ reserve in consumables.
• Increase the supply of money in the market (i.e. the interest only without the principle) to tackle the increasing lines of inflation due to the reasons discussed above.

The direct percussions of this monetary policy is putting shades on the "Real Estate sector" in Egypt, as usually the crowd owe this as the value vault of the market in the time of crises. In a recent report for Coldwell Banker revealed, ".....the Real Estate prices would surge by 15% in 2022, due to the surging prices of the inputs, i.e. building materials by a range of 20-30%".

Adsorbing the main stream liquidity from the market in the new CDs would curb the demand on the real estate and throughout the Dominos effect, the sector might face what so called "Stagflation", meaning in simple language, "Persistent high inflation combined with unemployment and stagnant demand in the economy.

Finally, all press releases are still digesting the move yet.

To be continued,.....

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