FX and the new reality
When business leaders, investment bankers and corporate lawyers are seen poolside during the day over the course of the workweek, it’s a clear sign that the economy is in trouble. Big trouble. In the months leading up to 3 November, everybody was twiddling their thumbs as market activity ground to a halt and players waited (im)patiently for the FX overcast to blow over. The mood was gloomy and bleak, with no clear end in sight.
That was then. Today, we can rejoice, for the drought is over. Transactions are being resumed with vigor right, left and center. Welcome to the exciting new world of a fully floated currency regime. Although nobody expected a full float, everybody anticipated that something had to give — that devaluation (in some shape or form) was imminent. When the free float and deep devaluation finally arrived, the public outrage expected by the naysayers never materialized. Despite the paranoia of the media and some within government circles, 11/11 came and went with no backlash to speak of. Nothing happened. Zilch. Nada.
But it would be a step too far to say that there has been no reaction whatsoever. After all, the impact of the float of the pound — not to mention some of the other austerity measures that have been recently introduced — has had a whirlwind effect on every household and every business in the land.
People of all walks of life check buy / sell rates for the USD daily and lament or rejoice based on whether the rate is going up or down. We have become a nation obsessed with monetary policy, and every man, women and child has become an economic pundit overnight, speaking with authority on what to expect in the short, medium and long terms. Those fortunate enough to have some modicum of savings have to contemplate whether to stick or twist, buy or sell — or just put their money in real estate as they have done for thousands of years — to hedge against a new period of uncertainty and volatility.
The emotional roller coaster has left most of us feeling conflicted. On the one hand, we need to adapt to a new painful economic reality in which cutbacks on spending are necessary to survive. Survival is relative, of course, and some will need to make more difficult decisions than others. Nevertheless, nobody is ever really happy with having to live a more modest lifestyle, especially when the underlying cause of your downfall is utterly beyond their control.
On the other hand, this is not Egypt’s first “crisis.” Deep down, we know that we need to dig ourselves out of this hole. Sugar shortages, medical shortages, baby formula shortages and any other shortages are a clear sign of a dysfunctional and unsustainable economy and, despite what those hardened Nasserists will tell you, we really do not want to go back to those “good” old days, thank you very much.
Comparisons with Venezuela and other economically failed states are simply not something with which we want to be associated.
We are now in the midst of getting to grips with the aftermath of the currency float, and that is no easy task. Students who attend private schools and private universities are protesting, as we have seen even at the elite AUC for the past few weeks. The government is sympathetic, and the educational institutions know that compromises will need to be made.
The same tense conversations are taking place across all sectors and households. Landlords and tenants are scrambling to renegotiate contracts based on more realistic terms. The government is repricing contracts. Employees are pushing for salary adjustments and management are figuring out how to adapt their businesses to these new and challenging times. Some businesses, such as those in pharma, are threatening to close down all together if changes to their highly regulated pricing structure is not adjusted — and soon.
Nobody is immune and the only way to get on with our daily lives and the business at hand is to come to the negotiating table and to figure how the market will operate in the new reality.
Despite these daunting and very real problems, you don’t need to be an economic expert to figure out that with new challenges come new opportunities — or that those who are the quickest to react and adapt will seize those opportunities.
And look, perhaps we can take comfort that we are not alone: Russia, Argentina, Azerbaijan, Kazakhstan and Nigeria have all recently gone through deep structural reforms and significant monetary policy adjustments to get their economies back on track (with varying degrees of success). Rightly or wrongly, the Egyptian experience is already being touted as a success story on how to go through a devaluation. As Mohamed El Erian has been telling us over and over again, we now live in a crazy world in which statistically improbable things happen more and more frequently. We are part of this global economic family of nations whether we like it or not, and we are not immune to its ills. But if we play our cards right, we can seize some opportunities for a change instead of others benefitting from our misfortune.
Over the past few weeks, the Egyptian stock exchange has been performing brilliantly, despite the Trump Slump and mass exodus from EM assets. Analysts from the global investment banks are heralding Egypt as a fixed income global upside story. The government is making all the right noises to lure back foreign direct investment and boost confidence in the Egypt story. If we continue with the economic reform program and introduce competitive investment incentives, reduce the public deficit, push for exports and import substitution businesses and all the rest of the things we know we have to do, then we can pat ourselves on the back for a job well done and hope for the best.
The alternative of muddling through — of half measures and taking one-step forward, two steps back — will simply not do, because it will inevitably lead to the same results we have endured over the past few years.
So, as things stand today, despite our bitching and moaning, Egyptians seem to be willing to tough it out and hope for a better tomorrow. Is it too early to say that there might, just might, be a newfound level of resilience? Or are we just too tired to throw a tantrum? Nobody really knows, but at least for now, most people are not dwelling too much on the mistakes of the past (of which there are many) and how we got here, but instead are focusing on adapting to this new reality.
This article was first published on Enterprise on Friday 2 December 2016