Egypt Bank shares signal expectation of pound devaluation

The London-listed securities of Egypt’s largest listed bank are signaling expectations of another devaluation in the North African nation’s currency.

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Commercial International Bank’s depository receipts on the London Stock Exchange are trading at a 31 percent discount to their shares in Cairo — the most since August 2016.

That reflects expectations that Egypt will allow its currency to weaken again, according to Hasnain Malik, a strategist at Tellimer in Dubai.

“The unwillingness to move to a fully flexible currency means another chunky devaluation is coming,” he said.

Concerns that pent-up demand for dollars won’t ease without more currency flexibility and stronger investment flows have fueled speculation that Egypt might have to allow its fourth devaluation since March 2022.

The value of the pound on the local black market has diverged further from the official bank rate and derivatives traders are hedging against the prospect of a steeper drop.

In the non-deliverable forwards market, the currency’s 12-month contract slumped to 41.6 per US dollar. The pound has weakened about 50 percent since March last year and was trading around 30.9 on Wednesday.

The government pledged in October to move to a more flexible exchange rate, enabling it to clinch a $3 billion deal with the International Monetary Fund. Gulf countries, meanwhile, are waiting for more certainty on the pound before making good on promises to provide billions of dollars in investment.

“Egypt’s financing options have narrowed considerably,” Farouk Soussa and Sara Grut, analysts at Goldman Sachs Group Inc., wrote in a report last week. “The move towards a flexible currency would likely see a convergence of the official exchange rate towards the parallel market rate, and would need to be paired with additional rate hikes to keep inflation at bay, a difficult adjustment against the backdrop of already high inflation and low growth.”

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