Egypt VS Coronavirus: The pound faces a war of attrition, not crisis

    Financing from the International Monetary Fund and a successful eurobond issue look sufficient to ward off the “Sword of Damocles” hanging over the Egyptian pound. In this second part of our series on the impact of COVID-19 on Egypt, we examine if its reserves are strong enough to prevent a currency crisis.

    This is part 2 of a series.

    “Damocles” is the label used by Nomura to identify emerging market currencies which are seen as at risk of a crisis within the next 12 months. On the index, if a country receives a score above 100, it is then labelled as vulnerable.

    Egypt was added by Nomura to the six-country danger list in April, jumping straight into first place despite having previously failed to make the list.

    The COVID-19 pandemic raised the risks for the Egyptian currency in several ways. Tourism, which was bringing in US$1b a month, has collapsed. Many foreign investors have sold their Egyptian T-bills. Revenue from the Suez Canal has slumped, with the Economist Intelligence Unit in London predicting a 22.6% decline in global trade volume in 2020.

    READ MORE Coronavirus: How is Egypt navigating the economic fallout?

    The Egyptian pound had been weakening even before Nomura’s April report. The currency has been declining since reaching a high of 15.6 to the US dollar in mid-February, and now trades at 16.18.

    • Nomura sees the pound ending 2020 at 16.55, before falling by another 4% to 17.20 by the end of 2021.
    • Nomura tracks 30 countries for its measure. A score of 100 or more puts a country on the danger list.
    • Egypt now has the highest Damocles score of 176, a jump of 91 points from July 2019.
    • Eight factors are used in Nomura’s assessment: import coverage, short-term external debt, exports, foreign reserves, broad money, short-term real interest rates, cumulative non-FDI gross inflows, fiscal and current account balances and the real effective exchange rate.

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