While the world remains focused on the unfolding political process in Egypt, the nations currency is teetering on the edge of a major devaluation.
E gypt’s trade and current account deficits were historically financed by foreign capital flows, but, since the revolution, foreign flows have reversed. Not only are net portfolio flows now negative but the FDI balance has also dipped into negative territory. For some time the Egyptian authorities have artificially supported the exchange rate but their ability and resources to continue to do so has diminished. Foreign exchange reserves have been run down by two-thirds since 2011 and policymakers can no longer support the currency at current levels. International reserves now cover less than two months worth of imports.
The authorities maneuvering room on the exchange rate is rapidly closing.
Our Emerging Markets Strategy service expects a 20-25% depreciation to take place in the next three to six months. When the currency finds a floor, interest rates will drop considerably, which in turn will boost the stock market. Nevertheless, earnings of listed companies in Egypt have been contracting for four years and equity valuations are not particularly cheap.
This, along with structural negatives, implies that any potential upside in Egyptian stocks should be viewed as a trading opportunity rather than a long-term investment.