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Home is where the investment is Investing in a country’s currency is like investing in the country itself. A nation’s legal tender is the most primal representation of its economic worth – even more than its stock market or treasury bills. The foreign-exchange market is, in itself, the largest arena of trade in the world, with nearly $1 trillion worth of the planet’s multifarious currencies changing hands every day. The government’s recent decision to devalue the Egyptian pound was undoubtedly a smart play for several reasons, and should go a long way in convincing investors and the public that enough dollars are available to meet their needs. Yet despite the devaluation, the temptation remains for many to dollarize their assets as soon as possible, on the chance of further depreciation. It is inarguable that the dollar offers advantages in terms of stability, and investors will usually go for the option that promises the least risk. Fair enough. No one will choose to keep his or her cash in a currency that’s on the brink of devaluation. Still, currency speculation is exactly that – speculation. People are essentially guessing what direction a currency will take. Speculative foreign-exchange transactions aren’t based on a known price differential, but on a mere prediction that the price of money will change. And these predictions, in turn, are often based, not on hard economic facts like the reliability of a country’s institutions and the strength of its industrial base, but on the speculative buying and selling of other traders. Meanwhile, profits made through currency speculation – unlike funds obtained via lending – don’t generate any new net capital. In the realm of currency trading, one trader’s profit means a loss to another, reducing the process to a zero-sum game in which equity is simply redistributed among those with cash to gamble. But these are problems faced by most, if not all, developing nations. What puts Egypt at a disadvantage is a peculiar culture of pessimism, in which anything American – not only the currency – is considered better. In shops around the country, everything from bread to cigarettes is advertised as having “real American taste,” implying the inferiority of all things domestic. The sad thing is, many people buy it. They might not like America’s politics, but they sure like its flavor. Of course the barrage of condescending – mostly negative – commentary from several international (read “Western”) ratings agencies, like Flemings and Standard & Poor’s, can’t help the Egyptian self-image either. If you tell someone something enough, it’s only a matter of time before they start believing it. Thus, a self-fulfilling prophecy is spawned. A central bank that pegs its exchange rate to a “hard” currency, such as the dollar, guarantees investors the right to exchange their local currency for that hard currency without taking a loss from subsequent devaluations. But if local investors begin to suspect that central bank reserves are inadequate to make good on this guarantee, they will flee the local currency – which only serves to further deplete hard-currency reserves, ultimately ensuring the very devaluation they feared in the first place. Egyptian professionals often voice complaints that massive swathes of their most ambitious colleagues have long since left for work in the United States or Canada or Europe. Currency flight is a symptom of the same malady: a simple lack of faith. ADAM MORROW |
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