Egypt Is Closer to Ending Devaluation of Year’s Wildest Currency

(Bloomberg) — Egypt’s third major currency devaluation in less than a year appeared closer to achieving its aim, with signs that the foreign-exchange market may be stabilizing despite a whipsawing pound.

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The North African country has allowed its currency, in small steps, to fall. Last week’s devaluation helped to close the gap with black market prices.

The pound saw its biggest drop in one day since October, Wednesday’s plunge. It fluctuated between gains of more than 1% and losses of 3%. Black market traders stopped operating this week after the plunge.

The pound is still the world’s worst performer this year, and measures of short-term historical volatility show the swings are the most extreme globally. Citigroup Inc. reported that the pound lost record-breaking amounts on Wednesday after states sold dollars.

Foreign exchange was scarce for months in Egypt as the economy of the Middle East’s most populous country contended with the rising cost of commodities from food to fuel, triggered by Russia’s invasion of Ukraine. Since October, 33% has fallen in the pound. Egypt declared that it would accept a flexible rate of exchange, which helped it secure a loan of $3 billion from the International Monetary Fund.

“The end of the devaluation process is close and we are now heading towards more flexibility,” Citigroup strategists including Luis Costa and Lydia Rangapanaiken said in a report. “Although we do not expect the authorities to shift to a free-floating regime, further flexibility is expected, in line with the fund’s requirements.”

Citigroup reports that trading volumes increased to around $831 million on Wednesday. This is a sign that dollar demand is easing and that a backlog is being cleared.

In a sign that foreign capital is trickling back into the country, investors from other Arab countries made net purchases of around 7 billion pounds ($236 million) in Egyptian Treasury bonds in the secondary market on Wednesday, according to the local stock exchange’s website.

The auction of Treasury bills Thursday will be a major test of foreign investors’ appetite for Egyptian assets.

Last year, the reluctance to allow for a steeper currency adjustment was a turnoff for international buyers, whose retreat from the local debt market helped push up the yields on Egypt’s Treasury bills by the most since 2016.

According to a banker, the dollar inflows into interbank markets reached $750 million Wednesday, up from $150 million annually previously.

On Thursday, the pound traded at 29.61 against the dollar. It fell as high as 14% to 32.1 on Wednesday, a new record.

The parallel rate declined to 29-30 on Wednesday from 31-33, according to Citigroup’s strategists. Wednesday’s moves “reflect steps in the right direction,” they said.

–With the assistance of Abdel Latif Wahba

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