Devaluation fears rise in Egypt and Saudi Arabia

The past month has bought mounting speculation about currency devaluation in the region’s two largest economies, Egypt and Saudi Arabia. In the case of Saudi Arabia, we think this is extremely unlikely. The adjustment to cheap oil is most probably going to come via tighter fiscal policy, with currency devaluation only likely to be used as a measure of last resort. In Egypt, though, we think there’s some justification for this speculation. The government appears to be pushing for foreign currency controls to be lifted, and the recent appointment of TarekAmer as Central Bank of Egypt governor suggests that the country might be about to shift to a more flexible exchange rate regime, which would inevitably entail a weaker pound.