Egypt’s equity markets strengthened after the central bank said it would allow the Egyptian pound currency to float in an attempt to counteract the dollar shortage that has pressured economic growth. However, the sudden depreciation in the Egyptian currency has dragged down the country-specific exchange traded fund.
Since the November 2 close, the VanEck Vectors Egypt Index ETF (NYSEArca: EGPT) plunged 29.8%, with Thursday trading volume surging to over seven times its daily average, while the benchmark Egyptian EGX 300 Price Return Index gained 3.4%.
The sudden depreciation in the Egyptian pound currency fueled the plunge in the U.S.-listed Egypt ETF after the central bank announced a free float. Since November 2, the Egyptian pound plummeted 43.0% to $0.0642 from $0.1126.
[related_stories]EGPT tries to reflect the performance of the MVIS Egypt Index, which is comprised of companies that are incorporated in Egypt or that generate at least 50% of their revenue in Egypt. However, since the underlying securities are denominated in EGP, any weakness in the Egyptian pound would negatively affect the U.S. dollar-denominated returns for EGPT investors.
The forex market will continue to experience some short-term pains.
“Anything that is in-between, in particular any pegs that lack credibility due to a lack of reserves and are far removed from fair value, are a bad option,” David Hauner, a strategist at Bank of America Corp, told Bloomberg. “This adjustment is never easy. There is clearly a period where things get worse, but when you look at the experience of countries that have moved to a free-float, it has proven to be beneficial.”
The currency move, though, is seen as a net positive for the Egyptian economy in the long-run. The International Monetary Fund welcomed the flexible exchange rate, arguing that the new system will inject more money into the economy, attract foreign investment and support tourism and exports, Bloomberg reports.
SEE MORE: Egypt ETF Strengthens on Economy Cash Infusion Revival
Moreover, the reforms may help the country move toward securing a much needed IMF bailout.
Egypt has struggled to support an ailing economy since the 2011 uprising that ousted Hosni Mubarak.
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VanEck Vectors Egypt Index ETF