Goldman On Egypt Pound: Bullish or Wrong?

Goldman Sachs says buy, buy, buy the Egyptian pound!

“Egypt demonstrates massive “carry” meaning, that yields in Egypt are WAY higher than they are in the US, which is generally good for the currency”.

If Goldman says so, it must be true right?

The bank also says the Egyptian pound is “remarkably stable.  Volatility is incredibly low”.

But what Goldman fails to mention is how much the Egyptian central bank has intervened in the currency to keep it that way.

The currency has only dropped about 5% since the beginning of last year, and that has cost more than $20 billion in foreign currency reserves (the pot is at a meagre $15.12 billion, from $36 billion at the end of 2010.  Some sporadic increase have been because of one-off payments rather than sustainable economic growth).

Another major cause for concern is what the central bank doesn’t tell us.  The central bank intervenes with the pound heavily.  As we speak, Egypt’s central bank looks like it’s allowing the value of the currency to decline slowly, despite promises to the contrary.

I’ve also been informed by a couple of currency traders at two state banks (Bank of Alexandria and National Bank of Egypt) that two major banks – the Suez Canal Bank and Arab African International Bank – carry out trades on behalf of the central bank to keep tabs on the pound by buying and selling the currency themselves.

There’s a limit to how much the central bank will allow the pound to move.  And that’s why it is not very volatile.


Finally Goldman says the newsflow from Egypt has been positive.  That’s one way of putting it.  But in fact,  investors are confused with the president totally ruling out a devaluation, while simultaneously senior members of the Muslim Brotherhood and Freedom and Justice Party appear to be voicing uncertainty about what to do.

It’s a risky business where foreign direct investment, though slated, is not guaranteed.

Mohammed Radwan, head of equities at Pharos Holding told me “either way we expect further devaluation by the end of the year” by virtue of the fact there is not enough revenue coming in from FDI and tourism receipts to support the pound.

EFG Hermes, the Egyptian investment bank, also projects the pound will fall to 6.25 to the dollar by December 2012.

The value of the pound fell to 6.1015 to the US dollar on Monday September 3. The last time it was that low was December 30, 2004.

Perhaps Goldman supports the managed float and believes Egypt can continue to aggressively support the pound.  But ultimately this note is misleading to investors.


One Comment

  • Posted September 11, 2012 at 4:06 am | Permalink

    They also don’t say that the interest rate differentials would be cut out by a devaluation. At 17% current interest rates on govt debt are way higher than what you get in the eurozone or US, but traders factor in a 10-15% devaluation. Still a better rate, but not quite the same, and with a whole lot more political risk.

    GS has also been saying buy gold recently. Perhaps better tread carefully.

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