Egypt Lures Foreign Investors with Currency Devaluation
Egypt has allowed its currency to weaken to a record low, seeking to attract foreign capital and replenish reserves that dropped the most in almost four years during September, while the black market premium to buy dollars surged.
The Egyptian pound weakened 1.3% to 7.9301 per dollar after the country's central bank devalued it by the same margin at a regular dollar sale to local lenders, according to prices compiled by Bloomberg. That takes the currency's decline for the year to 9.8%, making it the worst performer in the Middle East behind Algeria's Dinar.
Foreign reserves in Egypt plummeted last month due to one-time expenses such as expanding the Suez Canal, upgrading the country's electricity grid and repaying debt to foreign oil companies, central bank governor Hisham Ramez said in a televised interview on Saturday. Egypt has burned through just under $6bn of loans received from Gulf Arab allies in April and is now seeking $3bn from the World Bank to support its budget.
"The central bank needed to allow the pound to lose some value as a basic step toward correcting the decline in its foreign currency base," said Hany Farahat, a senior economist at Cairo-based CI Capital, a unit of the Egypt's biggest listed bank, adding that the devaluation "should continue throughout this week, otherwise the move would be just insignificant".
Outside the banking system, the Egyptian pound tumbled to a record 8.484 to the dollar, according to the average quote of seven currency dealers surveyed by Bloomberg last week in Cairo, Alexandria and Aswan That compares with 8.204 on Thursday and represents a 5.6% premium over the official rate, the most since January, according to the weekly surveys.
The devaluation of Egypt's currency has been predicted by analysts since the beginning of the year and there is rising opinion that it has still to reach fair value for foreign investors. There is a common belief among real estate buyers in Egypt that there is another anticipated decline of the pound's value, but the timing is unknown which has consequently delayed investment due to uncertainty of future impacts on cost and revenues.
Investors are also concerned about existing restrictions on US dollar deposits in Egypt's banks and the complex process of transferring foreign currencies from inside the country, which represent the most significant challenges facing investments, over and above currency declines.
On the second day of Egypt's Economic Development Conference back in March, Egypt signed agreements and memoranda of understanding with international companies worth $158bn, signalling one of the best years for foreign direct investment to come. However, subsequent large-scale investment has been delayed while international investors eye Egypt's market with uncertainty as to where its currency will find its level.
Egypt's government has made considerable investment into its domestic residential market in attempts to satisfy the need for more than half a million homes for its rapidly expanding population, contributing to the woes of its currency last week. The strategy was for foreign investment to step up to support government spending, with a balanced injection of capital in the nation's real estate markets.
However, as a wait-and-see attitude prevails among foreign investors at least for a few weeks, it is difficult to say which way Egypt's property market will go. Recent real estate market activity has seen shortage of housing supply pushing up property prices, although transaction volumes have been high among foreign buyers nevertheless. At the current time, investors are reluctant to make decisions borne out of uncertainty, particularly due to the considerable impacts further currency devaluation may have on margins and capital value.
