• Ministry of Finance using EGP8.25 in new budget, Reuters reports Two official sources told Reuters that the Ministry of Finance (MOF) is assuming a USD-EGP forecast of EGP8.25 in its FY2016/17 draft budget, currently in the preparation process, up from EGP7.75 in the previous budget. Our previous experience shows budget currency forecasts are not necessarily to be read as the Central Bank of Egypt’s (CBE) price target, but more as a target devised by the MOF. Nevertheless, the number is definitely worth noting and hints that the government expects the EGP to weaken further, although at a much lower magnitude than our end-year price target of EGP9.0. The MOF forecast is only 5.1% below the current official rate and c5% stronger than the parallel market rate of EGP8.65/70.
• Government trying to put a lid on the parallel market Expectations of a weaker EGP are also fuelled, in our view, by the CBE’s recent move to increase the monthly limit on foreign currency cash deposits by fivefold for a number of sectors. The move is effectively a message by the CBE that it is allowing the parallel market to function but only within certain limits as shortly after the decision it agreed a cap on the parallel market rate with foreign exchange bureaus at EGP8.65.
• Reiterate view EGP is on devaluation path We see the news confirming our view that the CBE is taking gradual policy steps to potentially devalue the EGP. The timing of the move, however, remains closely associated with building a liquidity buffer, which we believe is essential to stabilise the market post-devaluation. Recent measures adopted to rationalise imports also suggest that near-term devaluation is not imminent and that if it materialises in the short-term it could be of a smaller magnitude, which would not clear the market, in our view. We have therefore recently tempered our expectations for timing of the devaluation to 2H2016 from an earlier target of 1Q2016.
• Three factors to watch We are closely monitoring the following three factors that we believe would give an indication on the EGP movement in the short-term: i) possible lifting of Russia’s travel ban; ii) negotiations with the IMF; and iii) further aid from GCC. The materialisation of the above would bring us closer to devaluation, in our view.

Mohamed Abu Basha