Cairo – Mubasher: Egypt’s mechanism for devaluation is more important than the timing at the current stage, said Pharos Research in a technical note on Monday, casting light on three main pivots.
First, the government has concluded a number of agreements on funding packages from Saudi Arabia ($2-3 billion) and China ($2 billion), but neither has been transferred or reflected on the net international reserve.
“If the funds have been transferred, then no announcements have been made ‘in an attempt’ to surprise the market with devaluation timing”, the note revealed.
Second, the IMF annual meetings on 7-9 October does not require a devaluation decision in advance to prove “good faith”. Even if so, there must have been an agreement between the government and the IMF on the devaluation rate and timing.
“Devaluation would be around the IMF annual meetings and not necessarily before”, said the research agency.
Third, the research firm stressed that “if the government has an 'edge-closer' plan for devaluation, with a rate of EGP11.00-11.50 in mind, a solid buffer of US dollar liquidity within the banking system is needed to convince market participants that this is a fair market clearance rate.”
The IMF deal includes “NIR build-up”, which means that “the funding packages have to be well-rationed and not utilized in currency defense.”\
Therefore, the mechanism for devaluation is more important than the timing in order to blow the black market and attract the FX supply into the banking system instead of their circulation through the black market channels.
