Analysts at MUFG Bank, point out the Egyptian pound looks overvalued but they see counterbalancing forces leading to only a modest depreciation. They forecast USD/EGP at 16.040 by the third quarter and at 16.570 for the first quarter of next year.
Key Quotes:
“The IMF (International Monetary Fund) estimated last month that the EGP is 6% above its fair value as the recent deterioration in competitiveness has weighed on Egypt’s exports. Meanwhile, while inflation is much slower than it has been over the past decade, it is still higher than its trading partners, indicating that the currency needs to weaken in nominal effective exchange rate (NEER) terms, to prevent the real effective exchange rate (REER) from appreciating which will further erode competitiveness.”
“Support for the EGP will stem from the authorities’ preference for maintained strength (reflecting a perception that currency weakness is unlikely to address the adverse external shock of the pandemic, and may lead to higher inflation) and adequate external buffers bolstered by accelerating financial inflows.”
“We view geopolitics and global uncertainties are also pressing risks to the EGP. Another EM risk-off could imperil financial inflows, which has been one of the key sources of currency support.”
“Although we view that EGP depreciation pressures will be sustained, we expect the downward path to be modest and controlled in the months ahead.”
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