14 March, AtoZForex, Lagos – Stocks rallied in Egypt after the central bank announced the devaluation of the Egyptian pound by about 13 percent, in a bid to navigate the economy towards a ‘more flexible exchange rate’ policy. The policy is also intended to help boost the country’s foreign reserves, which has fallen sharply from peak levels by over 50 percent since 2011. Egypt’s’ benchmark EGX 30 Index rallied 4.1 per cent, the biggest intra-day gain since January 24 in Cairo, following the decision from the apex bank.
Shrinking foreign reserves
The country’s foreign reserves have now stabilized at around $16 billion in the past six months, as policy makers aim to bolster the reserves to $25 billion by the end of 2016, according to a statement from the apex bank. Hence, the new devaluation policy will help achieve “exchange-rate levels that reflect the strength and real value of the local currency in a short period of time,” the central bank added in a statement on Monday.
The central bank earlier sold a total of $198.1 million to local lenders at the rate of 8.85 pounds per dollar, compared to a previous exchange rate of 7.73 pounds as the Egyptian pound devalued. The country continues to battle with a dollar squeeze, which has for a while been threatening economic growth in the most populous Arab nation. This is in addition to socio political tensions experienced in Egypt in recent times.
See also: BoJ next monetary policy measures
Hedge against currency risk
As the Egyptian pound devalued, Abdul Kadir Hussain, the chief executive officer of Mashreq Capital DIFC in Dubai, which manages about $1.5 billion said: “Particularly from the bond side, this gets the devaluation issue out of the way, which had been hanging over our heads for a long time. Now that we have this, it could potentially could open up Egypt for us again.” The company sold its holdings in Egyptian dollar-denominated bonds last year.
Also, to help investors mitigate against the risk of their exposure to the Egyptian pound, policymakers are weighing steps that would help hedge against the currency risk of investment in local government debt. With the Monetary Policy Committee set to meet on March 17, further details will be released regarding the new development.
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