Political headlines continue to dominate foreign coverage of
Egypt during its post-Arab Spring transition. However, a looming
currency crisis could exacerbate the already dizzying problems
for the fledgling democracy.
The Egyptian central bank is desperately trying to maintain the
current exchange rate of 6 pounds to the U.S. dollar; however
traders are less convinced, causing the
futures market to trade at 7.45 to the dollar
, an all-time low.
Political uncertainty, including the recent ruling
to ban ten presidential candidates
, also continues to weigh on the Egyptian pound.
As a result, Egypt's central bank is burning through its
foreign reserves at the pace of roughly $1.4 billion a month.
This number is likely to climb higher as the central bank
attempts to fight the forces of speculators in order to preserve
the value of its currency. According to the Egyptian Finance
Ministry,
foreign reserves are down to $15.1 billion
.
Students of economic history may wonder why the Egyptian
central bank is taking the Thailand-government-in-1997 approach
that eventually led to a pan-Asian economic crisis. Unfortunately
for Egyptians, near-term political concerns prevent the Egyptian
central bank from employing a more sane economic policy.
Because Egypt imports most of its food and fuel, the
government wants to keep prices stable in order to maintain order
ahead of country-defining elections in a few weeks. This
myopic policy of artificially propping up the Egyptian pound
will yield serious consequences later in the year as liquid
foreign reserves will run out in a few months, resulting in the
Egyptian pound moving at the behest of market forces. The
potential ramifications include a currency crash and a further
drop in Egypt's
already moribund economic growth
.
Consequently, a number of observers see a disorderly
devaluation in the country's future.
International intervention appears to be necessary if the
Egyptian economy is to stay afloat, and there have been
discussions with the IMF to offer Egypt a $3.2 billion loan. This
appeared to be a done deal just a few weeks ago, but the
likelihood of said loan actually coming to fruition now is
difficult to discern in light of
extant political difficulties
between the Muslim Brotherhood and the military. Without such a
loan, a currency crisis is all but a
fait accompli
.
Traders with access to the Egyptian pound should continue to
short the currency against the dollar. Further, traders should
stay short the Market Vectors Egypt Index ETF (
EGPT
,
quote
), as a likely devaluation and a concomitant rise in fuel and
food prices - along with political uncertainty - will continue to
weigh on EGPT.
