Bank of America Sees Near-term Appreciation of Egyptian Pound

Bank of America analysts believe that a near-term appreciation of the Egyptian pound, due to improved balance of payments dynamics, is the most likely scenario.

The bank said in a recent note: “The Egyptian currency has performed well since the last liberalization in the first quarter, and we believe that the carry trade still has room to perform in the coming months as the UAE support is sufficient to finance the balance of payments requirements, and the value of the Egyptian pound appears to be generally appreciating.”

The carry trade, commonly known as hot money or foreign investments in Egyptian treasury bills, is done by borrowing money from markets at low interest rates and investing it in markets that give higher interest rates on their local currency, taking advantage of the interest rate differential between the two markets. The volume of hot money recently reached more than $30 billion.

Bank of America expected the Central Bank to refrain from cutting interest rates in the near term and to wait for fear of the financial impact of the increases, and to maintain its tight policy. Bank of America sees interest rates turning positive in Q4 2024.

Real yields are the difference between nominal interest rates and inflation.

The bank explained that the reason behind its expectation of the pound’s appreciation against the dollar is the disbursement of the second tranche of Egypt’s deal with the UAE, which could cover the country’s external financing gap of between $5 billion and $10 billion over a year or two.

“This in turn provides scope for implementing reform, enhancing bilateral debt rollover rates, allowing positive multilateral marginal flows (excluding the IMF), attracting portfolio flows and supporting the accumulation of the Central Bank of Egypt’s foreign exchange reserves during the same period,” it added.

The dollar exchange rate in Egyptian banks fell to EGP 48 by the end of last week after touching EGP 48.5 at its highest level in the banking sector after the liberalization.