Egypt devalues Pound third time in 2015 after reserves slide, as Angola slashes spending by 50%

Egyptian Pound worst performer in the Middle East behind Algeria’s Dinar. In Angola the kwanza has been devalued twice this year.

TWO of Africa’s major economies took action Thursday to stabilise their wobbly economies and tanking currencies.

Egypt depreciated the pound for the third time this year after the nation’s foreign reserves tumbled and the currency fell to a record in black-market trading.

The pound weakened 1.3% to 7.9301 per dollar after the country’s central bank devalued it by the same margin at a regular dollar sale to local lenders, according to prices compiled by Bloomberg.

That takes the currency’s decline for the year to 9.8%, making it the worst performer in the Middle East behind Algeria’s Dinar. Twelve-month non-deliverable forwards for the pound slumped 3.4 percent, the most on a closing basis in almost two months, to 10.2758 per dollar as of 3:35 p.m. in Cairo. Stocks fell the most this month.

Egypt came under increased pressure to cheapen the pound after China’s surprise yuan devaluation in August fueled declines across emerging-market currencies as they sought to preserve competitiveness of their exports.

Foreign reserves of the most populous Arab state fell the most in almost four years in September, the same month the country announced its current account deficit had ballooned to $12.2 billion, the biggest gap in central bank data going back to 2000.

“The adjustment is welcome but only if it’s the start of a sustained depreciation trend,” said London-based Simon Williams, HSBC Holdings Plc’s chief economist for central and eastern Europe, the Middle East and North Africa. “The pound needs to be significantly weaker if Egypt’s external account position is going to recover and dollar inflows are going to rise.”

HSBC forecasts the pound will reach 9 per dollar by the end of the second quarter of 2016. Meanwhile, Barclays Bank Plc and Standard Chartered project 8.5 and 8.1 pounds per dollar, respectively, by then. All estimates were published before today’s depreciation.

Black market

The move comes a day after Finance Minister Hany Kadry announced the government is in talks with the World Bank for $3 billion of loans to support the budget and ease the dollar shortage.

Black market currency dealers in Cairo and Alexandria on average were charging 8.204 pounds per dollar today, according to a Bloomberg survey. That reflects the weakest pound since the poll was started in April 2013.

Government spending helped boost economic growth to 4.1% in the fiscal year that ended in June—the fastest expansion since 2010. Still, non-oil private business activity contracted in six of the first nine months of 2015, according to the Emirates NBD Purchasing Managers’ Index.

Devaluation “was becoming more expected given the toll that maintaining an overvalued currency was taking on the economy,” said Jason Tuvey, London-based Middle East economist at Capital Economics. “A move closer to the black market rate would, in our view, start to restore Egypt’s external competitiveness. But it’s difficult to see for how long and how far the central bank will allow the pound to fall.”

Economic reforms

Egypt can’t allow a sudden depreciation of the pound to its fair value because that would have a negative impact on almost 90% of Egyptians, Central Bank Governor Hesham Ramez said in an interview published in Al Shorouk newspaper today. Almost half of the population lives below or near the poverty line, according to a World Food Programme study.

Ramez added that Egypt’s government prefers to complete its economic reform programme before seeking a loan agreement from the International Monetary Fund. Foreign reserves fell almost 10%, the most since January 2012, in September to $16.3 billion. That covers less than three months of imports, compared with almost nine months before the 2011 uprising that drove President Hosni Mubarak from office.

The benchmark EGX 30 Index of stocks retreated 1 percent, the most since Sept. 29, with all but four of its members declining. The pound’s implied exchange rate, calculated using the differences of home and abroad shares of Egypt’s three most traded companies, fell 0.2 percent to 8.6624 per dollar, according to data compiled by Bloomberg.

Angola blues

MEANWHILE the government of Angola, sub-Saharan Africa’s second-largest crude producer, cut spending by half this year following a plunge in oil prices, Vice President Manuel Vicente said.

In the Angola National Parliament Thursday legislators heard government plans to put a big knife to spending. (Photo/David Stanley/Flickr).

Public investment was reduced by 53%, Vicente told lawmakers in a state-of-the-nation address on Thursday in the capital, Luanda. He delivered the speech in the absence of President Jose Eduardo dos Santos, 73, who was “indisposed,” according to parliamentary Speaker Fernando da Piedade Dias dos Santos.

Oil accounts for about two-thirds of fiscal revenue in Angola, putting the nation at risk after crude prices more than halved since June last year. The central bank devalued the currency twice this year and raised the benchmark interest rate four times in response, while the government has sought funding from the World Bank and China to help cushion the economy.

“We have had a contractionary fiscal policy, which has been guided by an amending of the state budget, embodied in a reduction of spending and more cautious revenue management,” Vicente said. “All this was possible thanks to the intervention of monetary policy and the injection of resources to cope with the current situation.”

The economy will probably avoid recession and expand 4% in 2015, he said. Debt is estimated to reach 45.8% of gross domestic product, he said.

“At this time, the macroeconomic indicators show us some stability and more encouraging prospects for the future, although they require a continuation of work that has been done so far,” Vicente said.

The kwanza has slumped 24% against the dollar this year and was trading at 135.305 on the interbank market as of 1:30 p.m. in Luanda.

-BLOOMBERG - Ahmed Namatalla reported the Egypt story, and Candido Mendes reported on Angola.

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