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The Egyptian Stock Exchange is in free fall… and the pound fears the 2016 scenario By Investing.com


Investing.com – Hours before interest rates on Thursday, the Egyptian Stock Exchange headed for more losses, falling to its lowest level since April 2020.

On the other hand, the pound held its breath, coinciding with receiving more indicators that point towards increasing interest rates, while the pound is trading near its lowest level ever.

And between an imminent agreement with the IMF brings to mind the scenario of liberalizing exchange rates in November 2016, passing through the decline of dollar reserves and the exodus of foreign investments, and the end of high inflation rates, the pound awaits the Central Bank’s decision.

Free fall

The Egyptian stock market fell during these moments of trading today, Thursday, to its lowest level in more than two years, as the main index fell to levels near 9,500 points, down by 1.2%.

The decline of the main market index egx30 came after semi-collective declines that affected the Egyptian stock market, as the prices of 150 shares fell, while the prices of 25 shares rose, while 10 shares remained unchanged.

pound today

Regarding the performance of the pound in the largest national Egyptian banks, the National Bank of Egypt and Banque Misr, the exchange rate witnessed stability for the fifth consecutive day at levels of 18.77 pounds for sale and 18.1 pounds for purchase.

The exchange rate against the Egyptian pound in the national banks recorded levels of 19.65 pounds, euros for sale, and 19.42 pounds for purchase, during trading today, Thursday.

The exchange rates also stabilized in private banks, where the Egyptian Gulf Banks, Abu Dhabi Islamic Bank, Piraeus Bank, Commercial International Bank and Alexandria Bank recorded levels of 18.79 pounds for sale and levels of 18.74 pounds for purchase.

new pressures

Two days ago, Egyptian Finance Minister Mohamed Maait said on the sidelines of his participation in the Qatar Economic Forum today, Tuesday, that 90% of foreign investments have already exited from debt instruments in the country.

The Egyptian minister returned to put more pressure on the Central Bank’s decision, as he said that his country is negotiating with the IMF on 3 formulas for the joint program with the Fund, the Extended Facility, the Credit Standby Agreement, and the Policy Coordination Tools Program.

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The Minister of Finance said that he is concerned about raising the interest rate by the Central Bank, hoping that it will give the economy an opportunity to grow while not burdening the budget with the burdens of high financing costs, but he is aware that controlling high inflation is the main objective of the Central Bank.

He said that during his tenure he witnessed 3 waves of capital flight from stock portfolios, but the current is 3 times more than the past times, as 20 billion dollars came out, representing more than 90% of foreign investments.

Will the 2016 scenario be repeated?

Among traders, the decline in the exchange rate was associated with the IMF agreements that often aim to liberalize exchange rates in order to attract foreign investments to the country, which coincided with the fall of the pound to unprecedented record levels.

The Central Bank of Egypt resorted to liberalizing exchange rates in November 2016 after an agreement with the International Monetary Fund worth 12 billion dollars, and the pound fell at that time from levels near 8 pounds to levels near 20 pounds before stabilizing for years near 15.6 pounds to the dollar.

In detail, this will not be the first time that the Egyptian pound has tested these levels against the dollar, as in November 2016 the Central Bank of Egypt announced the liberalization of the exchange market and the floating of the Egyptian pound against the dollar and set a guide rate at 13 pounds to the dollar, an increase estimated by more than 46% at once.

Before the Central Bank of Egypt’s decision in October of the same year, the black market was the main driver of dollar prices in the exchange market, as the dollar exchange rate on the black market recorded about 18 pounds, compared to about 8.88 pounds in the official market.

After that, banks operating in Egypt began to set the dollar’s price freely until the dollar’s exchange rate jumped at the end of the year to nearly 20 pounds, recording an increase of 53% since the launch of the indicative price on the first day of the flotation process.

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central decision

It seems that the Central Bank of Egypt is facing more challenges hours before the expected meeting today, Thursday, amid mixed expectations regarding the interest rate decision.

The Central Bank of Egypt’s decision coincides with a global rise in inflation that led central banks around the world to tighten monetary policy, as the US Federal Reserve, the Bank of England, the Swiss Central and Arab banks in the region decided to raise interest rates.

The Central Bank of Egypt raised interest rates for the second time in a row during this year 2022, starting with the first increase on March 21, when the Central Bank decided to raise interest rates during the activities of an exceptional meeting.

While the interest was raised for the time last May 19 to reach 11.25% on lending 12.25%, an increase of 200 basis points, the Central Bank of Egypt targets the annual inflation rate in cities at a level of 7% (with an increase or decrease of 2%) on average during the fourth quarter of 2022 .

Inflation rates in Egyptian cities rose to 13.5 percent in May, compared to 13.1 percent in April on an annual basis, while on a monthly basis, inflation fell by 1.1 percent in May, from 3.3 percent in April.

Installation Outlook

Hermes Investment Bank (EGX:) expected the interest rate to be fixed, and the investment bank said that the central bank may delay in a new interest rate increase at its meeting this month, pending several factors, most notably identifying the repercussions of increasing interest in the last meeting, and the outcome of negotiations with the International Monetary Fund to obtain Egypt on a new loan.

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The Research Department of HC Securities said that the monetary policy committee’s likely decision in light of the current situation in Egypt is stabilization, as it expected the Central Bank of Egypt to keep the interest rate unchanged at its next meeting.

While Beltone Investment Bank maintained unchanged expectations of fixing interest rates at the Central Bank of Egypt, Beltone Investment Bank said that raising the US interest rate has already been taken into account in any expectations issued for interest in Egypt during the recent period, including the expectation for the next meeting or raising interest by 2% during The second half of this year.

Lift predictions

Prime Research firm expected the CBE to raise interest rates by 100 basis points next week, especially since recent treasury bids were only partially fulfilled due to offering much higher-than-expected returns.

Prime Research said that this follows the example of central banks in the Gulf Cooperation Council countries, which followed in the footsteps of the Federal Reserve to defend their currency pegs.

Al-Ahly Investment Management Company expected that the Fed’s raising the interest rate by this percentage may push the Central Bank of Egypt to raise interest by 1% at a meeting next Thursday to face the consequences of raising interest rates on the Egyptian economy.

overvalued

HC said the Egyptian pound is overvalued, as evidenced by the JP Morgan Real Effective Exchange Rate Index at 108 basis points, the change in the outlook for the Egyptian economy to negative from stable by Moody’s, heavy selling in emerging markets, and lower yields on T-bills. Treasury one-year terms hinder the flows benefiting from the price differentials and reduce the benefit of raising the interest rate, from our point of view.

The investment bank added that we note that the yield on one-year treasury bills increased by 90 basis points only after the interest rate increases by 300 basis points, while the yield on 3-month treasury bills increased by 370 basis points.

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