Egypt’s central bank slashed key interest rates by 1.5% on Aug. 22, triggering public concerns about a possible depreciation of the local currency. As locals are seeking a haven from inflationary pressures the US dollar, real estate, gold and the stock market emerge as plausible answers.
Amr Abol-Enein, managing director of CI Capital Asset Management, dismissed any fears of dollarization, citing Egypt’s improved macroeconomic indicators as the main drivers other than the interest rates.
“There will be no dollarization as the interest rates in Egypt are still high. The greenback exchange rate in Egypt is set by the country’s inflows, which have been on the rise since the currency float. An increase in exports, narrower gap in the trade balance, higher revenues from tourism and foreign direct investment may foster the greenback’s depreciation versus the pound,” Abol-Enein told Al-monitor.
He forecast more monetary easing steps in the coming period as inflation is well contained below 10%.
“The impact is positive for the real estate sector where the rental yield relies on interest rates. Lower rates mean more real estate capitalization. Developers will take an easing monetary policy in their off-plan sales,” Abol-Enein noted.
He urged parties concerned to closely observe the performance of global markets in the wake of a trade war and other tensions, making clear that the local market cannot be isolated from the rest of the world.
“As for gold, there is no correlation between the local interest rates. Gold is a commodity traded on world markets, which set the price of the bullion globally. Gold prices worldwide have been rising on investor fears and tensions. Gold is a haven for investors when tensions affect markets,” Abol-Enein added.
However, Samy Ibrahim, owner of a Cairo-based gold shop, thinks the rate cut bodes well for the precious metal sales in Egypt. “But that will be in the long term,” Ibrahim told Al-Monitor. “There will more rate cuts. The safest store of value is gold. Although the local market is sensitive to the global prices, demand for gold may pick up as banks cut yields on deposits.”
“The increase in prices over the week has not been driven by higher demand. It has been mainly because of spiraling world prices. The impact of the interest rate cut will take time; we still have to wait until the high seasons,” Ibrahim said.
According to him, Egypt's high seasons, which witness marked demand for gold, include the month of Ramadan, Eid al-Fitr (the feast that marks the end of Ramadan), Eid al-Adha (the feast of sacrifice), Mother's Day (March 21), New Year's and Coptic Christmas (Jan. 7).
“The 21 karat, which is the most popular in Egypt, exceeds 700 pounds [$42.20] per gram. The 24 karat sells for more than 800 pounds [$48.20] per gram. The prices are set according to the global markets. Historically, gold prices usually take an uptrend,” Ibrahim said, citing that a gram of 21 karat of gold averaged 100 pounds ($6) more than 10 years ago.
According to Ibrahim, the 21 karat gold accounts for 70% of sales in Egypt. He said the exchange rate “is another key factor,” in addition to the global bullion’s price.
“Prior to the pound flotation in 2016, the dollar stood at 8 pounds [$0.48]; now it averages 16.60 pounds [$1]. At that time the local gold market was seriously impacted as sales dropped significantly. If the interest rate cut weakens the pound, the domestic gold market will be negatively affected,” Ibrahim said.
As for the local stock market, analysts say it will be another gain in the long run as retailers will gradually switch to more profitable assets.
The market capitalization of Egypt’s listed stocks rose by 1.4% to 770.2 billion pounds ($46.47 billion) on Aug. 25-29. The main index surged 3.5% to 14,835 points over the week, which ended on Aug. 29. The market capitalization jumped 7.7% month-on-month in August, up from 715.1 billion pounds ($43.2 billion) the previous month. In August, volume rose to 57.8 billion pounds ($3.5 billion) from 46.3 billion ($2.8 billion) a month earlier.
“The benchmark index may reach 15,300 points in September. Shares in blue chips — Commercial International Bank and EFG Hermes — boosted the week’s gains after the rate cut,” Ibrahim el-Nemr, head of technical analysis at Naeem Brokerage, told Al-Mal business news portal Aug. 29.