The Impact of Currency Devaluation on the Stock Market Development and Foreign Indirect Investment: Evidence from Egypt
HASSAN MOUNIR ELSADY, ALIAA AHMED EL BEHERY and BAHAAELDIN SAMIR ALLAM
IJED, Vol. 16 No. 1, (2023)
This paper examines the impact of the Egyptian pound devaluation on the Egyptian stock market performance, development, and foreign indirect investments for the period 2002-2018, mainly the 2003 and 2016 currency devaluations. An Autoregressive Distributed Lag (ARDL) cointegration analysis performed to test long-term and short-term relationships among variables. It was found that the devaluation of the Egyptian Pound had a significant positive impact on the Egyptian stock market development in terms of market capitalization and turnover. Furthermore, devaluation shows a significant and positive impact on the short term foreign indirect investments, while it has no impact on the long term foreign indirect investments. This paper question whether devaluations were a means of restoring the Egyptian stock market attractiveness for foreign investors or a means of injecting hot money into the Egyptian market for short term capital gain. Finally this paper questions how to implement proper capital control rules to limit hot money injections, especially when governments are planning to devaluate its currency.