Currency pegs in focus after Egypt devalues

14/3/2016

By Katie Martin and Roger Blitz

Egypt abandoned its longstanding struggle to hold the value of its currency against the dollar, a shift that could prompt other countries to also undertake foreign exchange devaluations.

The Central Bank of Egypt said on Monday it would adopt a flexible exchange rate after devaluing the pound 13 per cent against the dollar.

The currency market expects other central banks to follow Egypt and seek greater policy flexibility, with Nigeria among those seen undertaking a devaluation to alleviate economic pressures.

Nicolás Maduro, Venezuela’s president, last month devalued his country’s bolivar by 37 per cent in an attempt to boost its ailing economy.

Luis Costa, a currencies analyst at Citigroup in London, said Egypt’s “bold” devaluation could prove to be a model for other countries such as Nigeria.

“These countries can’t put off an adjustment in their currency any more. I know it can be painful, and we know there will be pressure on inflation, but a liberalised FX policy is the right way to go,” Mr Costa said.

Nigeria heads a list of countries with currency pegs or strict currency regimes that may loosen their exchange rate policies.

Pressure on commodity prices last year forced Kazakhstan and Azerbaijan to abandon their currency pegs, as the strain on their reserves to maintain a stable exchange rate became too great.

The Gulf states of Saudi Arabia, Bahrain and Oman are seen as vulnerable to devaluation, although the commodity rally of recent weeks may relieve that pressure in the short term.

“It’s helped some of those central banks still trying to maintain those pegs,” said Piotr Matys, emerging market foreign exchange strategist at Rabobank. “But it still feels like a short-term squeeze rather than a sustainable rebound in the oil price.”

One currency showing early signs of stability following adoption of a weaker currency regime is the Russian rouble. But Mr Matys said other countries might not be able to manage the adverse public reaction to the soaring inflation that follows devaluation.

“There are lots of central banks under political pressure to maintain these pegs,” he said.

“No one dares to challenge [Russia’s] President Putin, and he got away with [devaluation] fairly unscathed, but I don’t think other politicians would escape protests.”

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