Recovery Advisers shares its take on the state-of-play and how it may affect the importing companies – indirectly all exporters, export finance banks and insurers.
Current economic situation
The Egyptian economy is currently grappling with several significant challenges, particularly due to the depreciation of the Egyptian Pound and the increasing rates of inflation. A key factor in this situation is the transition towards a more flexible exchange rate system, a shift that aligns with the requirements set forth by a USD 3 billion loan agreement with the International Monetary Fund (IMF).
This move to a flexible exchange rate is crucial for addressing the ongoing shortage of US dollars in the country. It is also seen as a necessary step to manage the rising inflation, which has been primarily driven by a substantial increase in food prices. The annual inflation rate in Egypt surged to 32.7% in March 2023, marking the highest level in six years. This inflation spike is closely tied to the global economic impacts of the Russia-Ukraine conflict (especially the grain/flour trade), which began in February 2022, exacerbating Egypt’s economic difficulties.
The repeated devaluation of the Egyptian pound has seen it lose about half of its value against the US dollar within a year. In response to these currency pressures, the Central Bank of Egypt is expected to implement monetary policy measures, including potential interest rate hikes. The Central Bank has already undertaken significant rate increases in 2022 and may continue with a stringent monetary policy to control inflation and stabilize the currency.
Additionally, Egypt is pursuing various methods to secure dollars, such as making more natural gas available for export and charging tourists in foreign currencies for certain services. The government is also exploring ways to attract private capital back into the country, which could include encouraging Egyptian expatriates to remit more money through banking channels.
The economic situation in Egypt is complex and multifaceted, with the government working to balance the needs of a large population living close to the poverty line while also addressing its debt burden and fulfilling the conditions of the IMF loan. The outcome of these efforts and the overall impact on Egypt’s economy will depend on the effectiveness of these measures and the global economic environment.
Outlook for 2024
The outlook for the Egyptian Pound in 2024 appears to be influenced by several key economic factors. According to a report by BMI Research, affiliated with Fitch Solutions, the exchange rate of the Egyptian pound is expected to decline by about 30% in the first quarter of the next year, reaching between 40 to 45 Egyptian pounds to the dollar. This decline is projected to coincide with a slowdown in the pace of inflation from 34% in 2023 to 27% in 2024. The BMI also anticipates that Egypt’s public debt will decrease, and the debt-to-GDP ratio will diminish slightly.
Capital Economics forecasts a different scenario: they expect the Egyptian pound to trade at 21 against the dollar by the end of 2024. This prediction is based on the expectation of a 25% fall in the value of the Egyptian pound by the end of 2024 if other variables remain unchanged. This analysis also takes into account the impact of Egypt’s weakening external position due to the Russia-Ukraine war and other global financial conditions.
Fitch Solutions has also commented on the Egyptian Pound, expecting it to lose nearly 20% of its value by the end of 2023, which sets a precedent for further devaluation going into 2024.
These varying projections suggest that the Egyptian economy and the value of the Egyptian Pound in 2024 will depend on several dynamic factors, including global economic conditions, domestic fiscal policy, and external financial support, such as from the International Monetary Fund. The actual outcome will likely depend on how these factors interact over the coming year.
How may it all affect your Egyptian buyers/debtors?
The anticipated depreciation of the Egyptian Pound in 2024 is likely to have significant implications for the payment capacity of Egyptian importers:
- Increased cost of imports: As the value of the Egyptian Pound decreases, the cost of imports priced in foreign currencies (such as the US Dollar or Euro) will rise. This means that for the same amount of foreign currency, Egyptian importers will have to pay more in terms of their local currency. Consequently, the overall cost of imported goods will increase.
- Impact on import-dependent industries: Industries in Egypt that rely heavily on imported raw materials, components, or capital goods will face increased costs. This could lead to higher production costs, which might be passed on to consumers in the form of higher prices.
- Strained cash flows and profit margins: The higher cost of importing goods could strain the cash flows of import-dependent businesses. Companies may find it challenging to maintain profitability without raising prices, potentially leading to inflationary pressures.
- Credit and financing challenges: Importers may face difficulties in securing credit as lenders become wary of the increased risks associated with currency depreciation. The cost of borrowing may increase, making it more expensive for importers to finance their operations and imports.
- Potential for supply chain disruptions: The increased cost of imports and potential financing challenges could lead to disruptions in supply chains, especially for industries that depend on a steady supply of imported goods.
- Risk management and hedging strategies: Importers might need to adopt more sophisticated risk management and hedging strategies to mitigate the financial risks posed by currency fluctuations.
- Shifts in import patterns: Some importers might seek to reduce their dependency on imports or look for cheaper alternatives from different markets to manage costs effectively.
- Negotiation of trade terms: Importers may need to renegotiate trade terms with foreign suppliers, possibly shifting to more favorable payment terms to mitigate the impact of currency depreciation.
In summary, while there are risks that could lead to an increase in payment defaults among Egyptian importers in 2024, the actual outcome will depend on a range of factors, including regulatory decisions and business responses to macroeconomic conditions. In the medium term, we anticipate reaching a stable currency with very high interest rates.
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