Egypt’s decision to devalue its currency by 14% against the dollar is “a step in the right direction”, though a further weakening of the Egyptian pound is likely.
Salah Shamma of Franklin Templeton Investments, who made the prediction, also says the likelihood of an interest rate hike has increased “considerably” as the central bank moves to hold down inflation and prevent dollarisation, the situation in which the Egyptian pound is replaced by the dollar.
“We do not expect today’s rate to be the final equilibrium rate,” says Shamma, who is head of investment for MENA equities. “The Egyptian pound is likely to weaken further in the near term as the Central Bank of Egypt manages upcoming FX auctions to close the gap with the black market.”
Ratings agency Fitch Ratings wrote positively of the devaluation, which ought to bolster confidence in the Egyptian pound and unlock foreign investment, however it warned the move would increase Egypt’s cost of borrowing.
The devaluation was nevertheless painful for those foreign investors in Egyptian assets who had not hedged their portfolios.
A fund manager for Ashburton Investments recently told Funds Global MENA that devaluations in the Egyptian pound and the Nigerian naira were needed to unlock stalled investment in African equities.
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