The Egyptian economy saw its currency devalued against the USD (the flotation) recently, casting a shadow over the economy and raising many questions about the effects of the devaluation on the market.
What is currency devaluation? Currency devaluation comes as a result of an increase in the exchange rate for a currency or a group of currencies. In the case of the Egyptian economy, the government was forced to take measures to devalue the currency as a precautionary step in anticipation of using up its foreign reserves.
How will devaluation affect the market/economy? The devaluation of the EGP came after liberalizing the exchange rate of the EGP against the USD by 15% and raising interest rates by 2% in response to the IMF, which set requirements for approval for a loan. International reports indicate that the EGP is “overvalued,” and some reports added, according to Deutsche AG. (Deutsche AG) and “Goldman Sachs” that the exchange rate of the EGP is overvalued by about 10%.
Devaluation of the currency as a first step pushes Arab and foreign investors to invest in the stock exchange and brings in more cash, which helps reserve liquidity in the market and attract foreign investments, especially for people who are waiting for the EGP to reach its lowest levels. However, this is expected to negatively affect inflation.
On a positive note, the currency depreciation encourages producers to export, as the devalued currency makes products cheaper and more competitive in the global market, and limiting imports due to high prices, and thus addressing the trade balance deficit.
The country resorted to devaluing the EGP in order to restore balance to its trade balances, or at least reduce the balance of the deficit. The devaluation of the national currency makes the prices of imported goods more expensive for residents of the country, which limits the purchase of goods from abroad and encourages demand for national products.
This was not written by Thndr and this is not investment advice, you should do your own research before making investment decisions.