Today I intend to take a trip to a country which has a rich history. There are of course the Pyramids for starters but also the city of Alexandria which has been described thus in the Guardian today.
“Alexandria was the greatest mental crucible the world has ever known,” claim Justin Pollard and Howard Reid, authors of a book on the city’s origins. “In these halls the true foundations of the modern world were laid – not in stone, but in ideas.”
The lighthouse,library and museum went on to achieve great fame but the man whom it was all named after never lived to see it as Alexander the Great went off on other campaigns and met his own demise. However this rich history is clashing with a very troubled present as the groundswell of the Arab spring meet a lower oil price and both actual terrorism and the fear of it impact.
The Egyptian Pound
This morning’s news comes to us from Arab Economic News.
The Egyptian central bank devalued the pound by almost 13 percent at an “exceptional” sale of dollars on Monday.
The central bank said it sold $198.1 million to local lenders at 8.85 pounds per dollar. That compares with a previous exchange rate of 7.73 pounds. It wasn’t immediately clear whether the lower price is just limited to Monday’s dollar sale. Central bank officials weren’t immediately available for comment.
I do like the idea that you could devalue just for one day! Especially as we are immediately given a clue as to why this has happened.
Egypt is grappling with a dollar squeeze that is threatening economic growth in the most populous Arab country. Foreign-currency reserves have tumbled by more than 50 percent since 2011, though they have stabilized at just over $16 billion in the past six months.
When a country sees a rush for US Dollars that is invariably a sign of what Taylor Swift would call “trouble,trouble,trouble” and can end up in the sort of situation I have described in the past in Ukraine were it becomes a parallel currency for some anyway.If we return to the foreign reserves situation we see another familiar tale as Reuters take up the story.
Egypt’s reserves have dropped from $36 billion in 2011 to $16.53 billion at the end of February.
Over this time the currency has been falling as @RtrsAgAnalyst points out.
As you can see the period after the Arab Spring has seen both currency declines and foreign exchange reserve falls in a familiar pattern for a fixed exchange rate. According to Renaissance Capital it had the most overvalued currency in real terms of any of the Emerging Markets. That is no doubt related to pegging your currency against the strong US Dollar. In a way this from Gerry Rice of the International Monetary Fund in January confirms this.
We would like to stress the need to raise exports in order to promote growth and for exchange rate flexibility to support this, allowing the exchange rate to move to a market clearing rate where supply meets demand, would boost exports, and prevent foreign exchange shortages.
Those who have followed the disastrous policies the same IMF has applied to Greece may reasonably be wondering why a “market clearing (exchange) rate has been denied to it? Perhaps it might provide an antidote to the usually sycophantic media coverage of its Managing Director Christine Lagarde if style could be replaced by substance. After all the quote about is a clear critique and indictment of IMF policy in Greece.
Why are devaluations invariably too late?
I think that there are three major reasons for this. The first is that establishments and what are considered to be elites tend to be much less intelligent than they think they are. Secondly reality is rarely a friend of theirs. Thirdly and interrelated to all this is that they usually try to get their own money out first! In a way this news from China from Saturday highlights this. From Bloomberg.
China is tightening restrictions on the use of third-party payment providers to buy insurance products in Hong Kong as authorities move to stem outflows of the yuan.
I am sure we will find investment elements in these products as we note how inventive people can be. Personally I believe that sometimes the authorities are slow to close down such channels – after all some US $1 Trillion has reported fled China in the last year -because they want a slice of the pie!
Last September the IMF pointed out that it was not all bad news.
Macroeconomic figures also point to some improvement, with growth rebounding to 4.2 percent in 2014/15, and inflation has declined.
However we feel a chill down our spines as we see the word “resilience” applied to the banking sector as that usually means it is either going to need it or a bailout will be required. Also at a time of political disquiet we are reminded of “trouble,trouble,trouble” again.
At the same time, unemployment remains high notably among the youth
Only six months before Christine Lagarde had pointed out this.
Over the coming five years, there will be more than 600,000 new entrants to the labor market per year.
Have you noticed how according to the world establishment both growing and shrinking workforces are a bad idea?! Poor old Goldilocks never seems to have her porridge just right or in IMF speak.
This is a moment of opportunity.
For those of you wondering things are not as bad a being “on track”. Although perhaps the IMF will inform us as to how raising taxes such as introducing the same VAT which has cause so much economic pain in Greece will help the poor in Egypt.
The currency controls imposed a year ago had created a bit of a crunch on the economy according to Reuters.
At the same time, the central bank lifted caps on withdrawals and deposits of foreign currencies for individuals and companies importing essential goods, easing forex controls imposed a year ago that had all but paralysed trade……..Businesses who saw a devaluation as inevitable were holding back on investment.
Also there is the issue of lower receipts from tourism as the impact of the Russian plane crash in Sinai and as we mull lower figures for the Baltic Dry Index this consequence from the Middle East Monitor.
a decline in revenue from the Suez Canal
The latest economic growth numbers showed 4.5% but they are from the middle of last year and with the workforce growth we note that per capita growth will be less. Any slowing will only reduce progress on that front and reinforce Egypt’s long-standing problems with poverty and inequality. As to interest-rates some 15% is being offered to investors today on some 3 year bills as long as you can provide some foreign exchange and inflation is 9.1%. For a description of that mixture let me hand you over to Ms. Britney Spears.
Don’t you know that you’re toxic
Any economic woe poses its own problem in a country that is already so troubled. For example lawmakers have accused the European Parliament of being influenced by the Muslim Brotherhood which as far as I know not even Nigel Farage accuses them of. Meanwhile the economy is one of those being affected by the lower oil price as the US EIA indirectly highlights.
Egypt is the largest non-OPEC oil producer in Africa and the second-largest dry natural gas producer on the continent.
Also Egypt has relied on loans from Saudi Arabia and the United Arab Emirates to finance its balance of payments problems and such funds must be in shorter supply. Add the issues described above and 2016 will be hard going especially as the troubles have seen falling gas production in spite of new fields being found.
On the upside there is this from the IMF research although of course it is not clear how this can coexist with the spread of fundamental Islam.
For instance, Aguirre and others (2012) suggest that raising female labor force participation to country-specific male levels would boost GDP in the United States by 5 percent,
in Japan by 9 percent, in the United Arab Emirates by 12 percent, and in Egypt by 34 percent.
Oh and who always benefits from establishment moves?
Commercial International Bank surged 7.0 percent and investment bank EFG Hermes jumped 9.9 percent. Real estate developers Egyptian Resorts and Talaat Mostafa Group each climbed more than 8.0 percent. (Reuters)