Why Egypt may need to devalue the pound
The country has a funding problem
It’ll need $41b by end-2023 to pay for:
- the current account deficit
- maturing debt
International reserves ($33b, chart) can only partially cover these before completely running out
1/5
The country has a funding problem
It’ll need $41b by end-2023 to pay for:
- the current account deficit
- maturing debt
International reserves ($33b, chart) can only partially cover these before completely running out
1/5
Egypt other funding sources are limited:
- Hot money has fled
- Market borrowing is expensive
- GCC may demand IMF deal
- Commercial banks are out of ammunition -- net foreign assets are negative (chart)
2/5
- Hot money has fled
- Market borrowing is expensive
- GCC may demand IMF deal
- Commercial banks are out of ammunition -- net foreign assets are negative (chart)
2/5
Devaluation would reduce funding needs
How?
It’ll cut the trade deficit by making:
- exports more competitive
- imports more expensive
But it’s not a free lunch:
It’ll add to an inflation rate that's already in double digits (chart)
3/5
How?
It’ll cut the trade deficit by making:
- exports more competitive
- imports more expensive
But it’s not a free lunch:
It’ll add to an inflation rate that's already in double digits (chart)
3/5
How far should devaluation go?
We estimate the pound needs to weaken to 24.6 against the dollar
That's about 23% depreciation from the current level
Calculations are in the table below
and full analysis on @theterminal
4/5
We estimate the pound needs to weaken to 24.6 against the dollar
That's about 23% depreciation from the current level
Calculations are in the table below
and full analysis on @theterminal
4/5
The IMF wants more pound flexibility
Egypt needs the IMF money
And has been a regular borrower from the fund in recent years (image)
But it’s also concerned about the side effects of devaluation
So may end up weakening the currency but by less than the economy needs
5/5
Egypt needs the IMF money
And has been a regular borrower from the fund in recent years (image)
But it’s also concerned about the side effects of devaluation
So may end up weakening the currency but by less than the economy needs
5/5
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