Fitch Solutions’ BMI research unit predicted that the pound will depreciate against the dollar during the remainder of 2024, if geopolitical tensions continue until the end of the year, when the dollar may range between EGP 47.9 and EGP 49.5, and may reach EGP 55 in some cases.
This forecast represents a lower range than the company had previously expected, which was between 46.5 and 47.5 pounds per dollar.
The company sees geopolitical tensions surrounding the region as continuing into the second half of 2024, increasing risks and worrying investors about the impact on Egypt.
Exit hot money
The value of the pound witnessed a decline due to the exit of foreign investors from Egyptian treasury bills, and the foreign holdings of these bills until April 2024 amounted to about $ 35.6 billion, which is equivalent to 47.5% of the total treasury bills and represents 91.2% of Egypt’s foreign exchange reserves of $ 46 billion.
According to the latest available data, foreign holdings of treasury bills increased by $19 billion in March and $2.8 billion in April, and are believed to have increased in May, supported by Egypt’s $14 billion in the second tranche of the Ras Al Hikma deal. But in June, as the threat of war between Israel and Hizb Allah escalated, those holdings fell by about $4 billion, and banks’ net foreign assets fell by $1.6 billion despite remittances from overseas workers reaching $2.6 billion.
The report expects hot investment inflows in the first week of August to exceed what was exited in June due to exchange rate weakness.
The impact of the conflict on Suez Canal revenues
Suez Canal revenues have fallen by more than $400 million per month since the decline in Red Sea shipping in December 2023.
The tourism sector is also suffering due to tensions, which could discourage investors from buying more Egyptian treasury bills and require the Egyptian government to increase returns on new issuances as we have seen in recent months.
Pound Forecast
BMI believes the Egyptian government is keen to let the exchange rate fluctuate, a requirement of the IMF program, which will be reviewed at the end of this year. The authorities will continue to intervene to prevent sharp fluctuations in the exchange rate.
The government intervened to support the pound on April 15 during the first round of tensions between Iran and Israel, and on August 5 during the second round, with the pound stabilizing around $49.2 between August 5 and 8.
In 2025, BMI expects the pound to depreciate by 2% to EGP 49.67 by the end of the year, as external financial factors such as large trade deficits and rising debt repayment bills continue.
The company put forward scenarios for the movement of the value of the pound according to the development of the conflict. The first optimistic scenario predicts a rapid de-escalation of geopolitical tensions in the region, such as a ceasefire in Gaza, which could boost the value of the pound to between 46.5 and 48.5 pounds.
The second pessimistic scenario predicts that the pound will fall beyond 49.5 pounds to the dollar, and possibly 55 pounds in the short term, which could lead to more investment outflows and a decline in foreign exchange reserves.
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