Egypt devalues to boost tourism

Tourists have stayed away after 11 September

Egypt has devalued its currency in the hope of giving its troubled tourism industry a shot in the arm.

Foreign investors may return to invest on the Cairo Stock Exchange

The move, a 7.8% devaluation of the Egyptian pound to 4.50 to the US dollar, is seen as a bold bid to bolster the country's economy.

The tourist industry's earnings have been hit as tourists have stayed away in the wake of 11 September.

But although a weaker Egyptian pound makes Egyptian holidays cheaper, the move will make life more difficult for companies with debts denominated in foreign currencies, said some observers.

Still, it will boost the earnings of major exporters, including oil firms, which will benefit when they exchange their foreign currency earnings back into the Egyptian currency.

Share moves

Stock market traders reacted instantly following the devaluation, snapping up shares in companies they believed would earn more following the move and offloading those which stand to lose out.

Mobile telephone companies - which have some of the highest dollar-denominated debts - were hit as investors worried that the loans would be more expensive to service, narrowing their margins.

Rally?

But not everyone agreed with that strategy, given that the devaluation had also made shares in Egypt's companies cheaper for foreign investors.

Black market currency trading is rife in Cairo

"The mobiles will pick up big-time," said CIBC Brokerage's Bassim Arida.

"The whole market will pick up because the market is now a lot cheaper for a lot of foreign clients."

This rise in demand, along with Mr Arida's belief that the mobile phone companies have hedged their currency risk, should boost stock in the sector.

"What's the first stock the foreigners will buy? The mobiles, which will be much firmer once American clients come in later in the day... Next week there will be a very nice rally."

Flexible

The Egyptian government has been trying to stabilise the exchange rate after intermittent dollar shortages over the past three years.

Foreign analysts and ratings agencies have been putting pressure on the company to introduce a more flexible currency regime.

Egypt has traditionally operated a fixed exchange rate policy, though its pound-peg against the dollar was abandoned in May 2000.

But in January, Egypt introduced a new "managed peg" exchange-rate regime that allowed the pound to trade in a narrow band, initially set at 1% either side of the set exchange rate.

The rate has been progressively lowered, and the band widened, since then.

Egypt is plagued by a large black market for foreign currencies due to the tight restrictions imposed on banks for dollar sales.

Black-market pound-dollar exchange rates ranged from 4.45 to 4.65 to the US dollar.